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  • Writer's pictureAnthony Tabanji

Amazon Buys Whole Foods: Now What?

Updated: Mar 29, 2019

5 Ways Amazon's Whole Foods Purchase Might Affect Your Natural Food Brand

As I write this, we are witnessing what is the equivalent of an 8.0 magnitude earthquake from a major tectonic shift in the >$600 billion grocery industry. 

e-Commerce giant Amazon has agreed to purchase natural foods grocery pioneer, Whole Foods Market, for $13.7 billion in cash... a 27% premium to yesterday's trading price of WFM.

The media's reaction: "Interesting." 

Back pats and high fives all around from Wall Street and activist investors, JANA Partners. 

Sighs of relief mixed with maybe some melancholy from John Mackey (who remains CEO under an Amazon-owned Whole Foods).

Sheer trembles from the executives of Kroger, Safeway, Target, Costco, Walmart, and perhaps most other grocery chains in the country... 

But where does that leave the Natural Food brand CEO?

What of all your labors to build a brand with Whole Foods as front and center of the industry? What of tirelessly navigating the UNFI distribution beast, working with "local foragers" and trying to ride the fast growth in this rapidly changing industry?

In truth, we've all seen this coming for a long time. The grocery industry has been ripe for disruption for years. Look no further than Whole Foods' past seven consecutive quarters of declining sales, the growth of natural foods aisles in the conventional channel, and as upmarket competitors like Thrive Market find innovative ways to bring superior value and quality to consumers. In yesterday's news, grocery-giant Kroger's stock plummeted by nearly 20% on their own weak earnings forecast, citing major fragmentation and competition. But this shift has been amounting long before this week's news and long before Amazon stamped its name onto it. 

So how exactly could Amazon's purchase of Whole Foods affect your natural food brand?

1. Say hello to a new model of distribution. First, Amazon's purchase of Whole Foods is likely to own Whole Foods' last-mile distribution... not specifically for its consumer-facing retail stores. Whole Foods stores will not become "obsolete" in the near future, as retail grocery still amounts to nearly 99% of total grocery spend. But you can bet that going to a grocery store is going to be a rapidly declining trend with Amazon in the picture. As the online retailer continues to pioneer its Fresh, Pantry and Prime Now services, look for each Whole Foods location to serve as drop-off and pick-up hub for Amazon's same-day delivery. 

What does this mean for your brand? Be prepared to adopt rapid response delivery in your existing supply chain. The fate of your business may depend on your level of responsiveness to rapid changes, especially as your product demands fluctuate and as Amazon continues to open the natural foods market beyond just Whole Foods customers and at lower price points. 

2. Lower prices, lower margins, higher distribution. Looking to Amazon's past industry disruptions, it's clear that the online retailer's strategy relies on accepting low-margin prices to destroy competition and gain market share as it adapts "traditional" industries online. The grocery industry should be no different. As we advise clients, continue to find and pioneer ways to build your brand around offerings which cannot be duplicated -- in sourcing, processing, intellectual property or branding superiority. The more value and differentiation your brand has, the more you will be able to command on pricing (and margins). Due to Amazon's immense scale, single-ingredient commodities and easily copied food/beverage offerings will naturally engage in price wars. This will severely hurt brands (and traditional grocery outlets) while benefitting consumers and Amazon... ultimately facilitating expansion into online grocery. 

3. Expect more private label. Whole Foods has a strong private label offering with its 365 line, aligning strong quality with great value. It's unclear yet if Amazon will maintain its own line of private label offerings, or if it will harness the Whole Foods brand, but the value proposition of private label aligns perfectly with the strategy of Amazon. Look for ways to pitch tertiary and complimentary offerings to your brand for private label, while maintaining your own brand strengths' on your product line, and not those which simply copy your products which can cannibalize your business. If executed correctly, you can have several streams of recurring revenues for years to come.

4. Upstart brands may need to look elsewhere to drive early product velocity and adoption. Whole Foods pioneered the natural and organics industry into what we know it as today - and many natural brands launched out of their retail channel. Yet Whole Foods was also unable to keep up with its own success, and competition entered the space from every angle. Recently, Whole Foods has been shifting away from a locally-focused sourcing model in favor of a centralized "planogram" system that widely offers the same selection of products in every region.

We can look for this trend to continue on a more rapid scale, and small, challenger brands may need to find alternative channels to gain their earliest customers before adoption before going to Amazon. Erewhon is ripe proving ground for the highest-end offerings. Thrive Market appeals to the conscious consumer. Even some traditional grocery might be inclined to test your natural brand as they seek greater innovation on their own shelves. And direct-to-consumer models such as website eCommerce are great ways to launch, especially for shelf-stable products with digitally-savvy founders. While Whole Foods may provide strong longer-term distribution and brand growth, you may want to consider launching your new product on the platform of a more aligned partner which is willing to support your success. 

5. Hope for the best, but prepare for the worst...the Amazon effect in the traditional grocery model. Most of all, buckle up. If you have 25%+ of your business resting on one grocery partner, it might be time to diversify. No one can predict the future, but we can look to past trends to help make informed decisions. Remember how you used to spend an afternoon in Barnes & Nobles or Borders, perusing books and magazines? What happened? The Amazon effect brought the world's library together in an easy-to-use, affordable, convenient way... and no one saw it coming. When the massive grocery shift picks up steam, remain agile and look for opportunities to benefit. This is no longer John Mackey's original "Safer Way" market... this is an eCommerce beast that disrupts everything in its path. The demand for natural foods remains strong. More than ever, it's critical to follow the trends online and remain proactive to the ever-changing landscape of the grocery business shift.



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