Much has been and will be written about Amazon’s blockbuster decision to buy Whole Foods last week. People far smarter than me will debate the impact of the deal on grocery retailers, food manufacturers, and consumers alike. For all I know, the strategy could blow up in Amazon’s face. But I wouldn’t bet on it. And here’s why:
#1 Whole Food Customers Already Buy A Lot of Groceries on Amazon
Only about 3% of U.S. adults currently spend $101 or more for groceries on Amazon in a given month. But look at the chart below. The incidence rate among weekly Whole Foods shoppers is a whopping 10% – over 3X larger than average. 36% of weekly Whole Foods shoppers currently buy at least some grocery items from Amazon every month. We’re obviously not telling Amazon anything they didn’t already know – but they’re clearly fishing where the fish are.
#2 Amazon Will Reach Entirely New Demographics of Grocery Buyers
Given that the two companies share a lot of customers in common, it should come as no surprise that Whole Foods shoppers and Amazon grocery buyers have some profile attributes in common. Both skew more affluent, educated, and non-white, for example. But there are many differences between the customer bases as well. Whole Foods reaches a decidedly younger, urban, and single, non-parent segment of shoppers. This acquisition should allow Amazon to broaden its audience of grocery shoppers overnight.
#3 Amazon is a Proven Threat to Whole Foods’ Main Competitive Set
Despite the growing competitive landscape, the majority of U.S. consumers (59% to be exact) still buy most of their groceries from local or regional retail chains like Kroger or Publix. For sure, Amazon and other online grocery services have slowly eroded the basket size (ie. the number of items people buy in one store) across the industry. However, the local/regional chains won’t be affected nearly as badly as Whole Foods’ more adjacent competitive set – brands like Trader Joe’s, Costco, Aldi, local co-ops, and other non-traditional grocery retailers. Walmart doesn’t appear to be as severely threatened. See for yourself:
#4 Whole Foods’ Quality Reputation Will Rub Off on Amazon’s Grocery Products
A little over a year ago, we wrote about Amazon’s burgeoning private-label grocery business, predicting a positive future. Not only did a sizable number of Amazon Prime users express interest in the new products; there was even a chance some new people would sign up for Prime as a result. The only thing holding Amazon back was a prevalent perception among consumers that their private-label products would be of lower quality than more established national brands. Whole Foods is virtually synonymous with quality (although you pay for it) and attaching its brand reputation to Amazon should help private-label sales immensely.
Time Will Tell
The dynamics of the changing grocery retail and food manufacturing landscape are extremely complicated. Consumers’ evolving media and technology habits, stay-at-home trends, fuel and commodity prices, social, environmental, and health consciousness, and new competition from Germany and elsewhere – it’s all making the future very hard to predict. But if you look at the foundation Amazon has to build on with the acquisition of Whole Foods and its customer base, don’t be surprised if the industry’s biggest concerns come to pass.