Amazon is buying Whole Foods in a deal valued at $13.7 billion. It’s a remarkable move for the e-commerce giant, which has traditionally been known for not owning brick-and-mortar stores and has traditionally preferred to build its own businesses organically rather than making big acquisitions.
But Amazon has been trying to conquer the grocery business for about a decade, with little to show for it. Amazon’s biggest rival, Walmart, has built a thriving grocery business, while startup Instacart has partnered with conventional grocery stores to enable same-day delivery. Buying a nationally known grocer gives Amazon a way to catch up.
Right now, Whole Foods offers grocery delivery through Instacart like many other grocery stores do. We can expect Whole Foods to end that deal and launch a Whole Foods- or Amazon-branded grocery delivery service instead. The partnership will save Amazon from the tedious process of building and staffing grocery warehouses all over the country for its existing AmazonFresh program.
And Amazon has a particular reason to hurry here because we’re not that far away from a future where groceries and other goods start to be delivered by drones. Companies have already started delivering packages using drones in China, and several companies have started to experiment with rolling drones in cities in the United States. The perishability of groceries makes it a compelling use case for drone delivery. And experience delivering groceries by drone will help Amazon prepare for a future where drone deliveries are a major part of the retail industry.
Amazon has struggled to get into grocery delivery
Amazon has been experimenting with the grocery delivery business for a decade. For the first few years, its AmazonFresh pilot project was limited to the Seattle area. More recently, the company has expanded the service to several other cities. The service offers same-day or next-day delivery of groceries, but comes with a stiff $14.99-a-month subscription fee.
And AmazonFresh hasn’t been Amazon’s only experiment in the grocery business. If you’re impatient, there’s a program called Prime Now that offers two-hour delivery. It offers some grocery items along with non-grocery items. At the slower end of the spectrum, Prime Pantry lets customers pay $5.99 for a big box of nonperishable grocery items like cereal, laundry detergent, and garbage bags.
But these services haven’t been a big hit with consumers, and the process of expanding them nationwide has been grueling.
“Where competitors have largely partnered with local grocers, meaning their employees and contractors simply go to stores, shop, and make deliveries as orders come in, Amazon instead has been investing in refrigerated warehouses and inventory,” TechCrunch’s Sarah Perez noted last year. “That has slowed its ability to expand at a quicker pace.”
Amazon has been stymied by the fact that delivering perishable items is expensive and grocery customers tend to be price-sensitive. And there’s the basic problem that grocery delivery is a new and unfamiliar concept for many customers, and Amazon isn’t the first name that comes to mind when people think about getting groceries.
Acquiring Whole Foods helps Amazon solve all of these problems. It will be able to operate its grocery delivery business out of Whole Foods locations, saving itself the hassle of building and staffing warehouses all over the country.
Meanwhile, branding the delivery business as a Whole Foods product could help Amazon attract more customers. Whole Foods has some of the industry’s most loyal customers. And Whole Foods customers are less price-sensitive than the average grocery store customer. The ordinary Whole Foods markup may provide enough of a margin for a profitable delivery business; if not, many Whole Foods customers may be willing to pay a delivery fee for the added convenience.
Whole Foods helps Amazon get ready for the on-demand future
Mastering the grocery business will pay larger dividends for Amazon down the road, because in the future the entire retail sector is going to look more like the grocery business.
Right now, Amazon’s two-day Prime deliveries are the industry standard. The company has experimented with offering next-day and same-day options, but these are too expensive to be practical for the mass market.
But obviously, two-day deliveries don’t work for perishable groceries, nor can FedEx workers leave a box of groceries on a customer’s front porch until she gets home in the evening. So grocery delivery services like Instacart have needed to build the infrastructure to offer deliveries measured in hours rather than days. Instead of having a handful of huge warehouses that serve the entire nation, Instacart works with grocery stores that are located a few miles from each customer’s house.
As delivery drones enter the market, though, every retail business will start to look like the grocery business. Sending out a drone will cost a fraction of what it costs to send out a human delivery driver, so two-hour delivery will barely cost more than two-day delivery. That’ll give an edge to retailers that have physical locations within a few miles of the customer.
And conventional retailers — especially Amazon’s biggest rival, Walmart — already have distribution facilities in cities all across America. Drones will allow them to transform their stores into warehouses for a drone delivery network, potentially allowing them to offer faster, cheaper delivery than Amazon can manage by sending packages using UPS or the postal service.
Owning Whole Foods, then, will give Amazon experience making short-term deliveries and managing a nationwide network of delivery centers. As drones get closer, experience operating Whole Foods will help Amazon understand if it makes more sense to buy other brick-and-mortar retailers as launching pads for a drone delivery service, or whether it’s more practical to build a network of standalone drone delivery warehouses.