Amazon and Whole Foods Two Years Later: The Acquisition Heard Round the Grocery World

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August 30, 2019

News Analysis

Let's go back to 2017: Amazon's acquisition of Whole Foods marked a turning point for the grocery industry. The biggest online retailer acquired a beloved grocery chain, known for high quality with prices to match, and promises to bring down those steep costs for customers.

Two years later, what impact did Amazon really have on Whole Foods prices, how much influence did this acquisition have on the grocery industry overall, and what can we expect from Amazon going forward in changing the way we shop for our everyday groceries?

First, the prices. According to Gordon Haskett Research Advisors, which tracked one Whole Foods store nine times since the deal's closing, the price of a typical Whole Foods basket decreased 2.5 percent.

While the delta is marginally noticeable, Amazon has gone through numerous pricing efforts to try to find the sweet spot — making double digit price cuts shortly after the acquisition, raising them earlier this year due to suppliers complaints about rising costs, then focusing on staples like meat and produce, and most recently, cutting prices modestly in August.

Unlike many other grocers, Amazon can afford to be a price winner, making up for lower margins by charging for its Prime membership.

Many of the discounts at Whole Foods are available only to Amazon Prime subscribers, and the long term play is for Amazon to lure in new subscribers through these promotions. While the price cuts themselves may not be obvious in the final receipt, customers may feel a sense of "FOMO" walking through the aisles of Whole Foods, if their lack of Prime membership precludes them from participating in these deals.

Beyond marginal price improvements, this acquisition has had a huge impact on the broader grocery industry.

Kroger, the second largest grocery chain in the U.S., purchased meal kit company Home Chef in a deal worth a reported $700 million, and inked a deal with UK-based online supermarket Ocado. With Amazon's expertise in efficient operations in mind, the idea is for Ocado's delivery and warehouse automation technology to help Kroger keep up with customer expectations of fast and accurate fulfillment. Kroger also teamed up with autonomous delivery startup, Nuro.

Kroger wasn't alone. Walmart partnered with Ford to test driverless delivery and expanded its alliance with Instacart. Instacart signed a deal with Albertson's. Albertson's bought meal kit company Plated. Target announced the launch of its own private label grocery brand "Good and Gather." And many other grocers teamed up through acquisitions or partnerships.

While some of these developments may have happened regardless of Amazon's acquisition of Whole Foods, the deal added an urgency to the overall industry to make investments in delivery tech, price, and assortment. All good news for consumers, getting us everything we need faster, more reliably, and at a lower cost.

Amazon will undoubtedly continue push into the depths of grocery to try to win our carts. While less than 3 percent of grocery orders happen online (around $13 billion), Nielsen and the Food Marketing Institute predicts that consumers will spend $100 billion per year on online grocery shopping by the year 2022.

With this huge opportunity to win wallet-share ahead of it, Amazon is reportedly working on its own grocery chain, in addition to its goal of 3,000 Amazon Go cashierless convenience stores (closing in on Walmart's 5,000+ stores in the U.S.) by 2021. These brick and mortar locations may also offer healthcare services, to aid in Amazon's push into yet another space.

One thing is for sure — Amazon's stores will be technology-equipped and will soon start to reflect the stores of our future (cashierless tech, in-app shopping, dynamic pricing, varied delivery and pickup options).

With so much to gain, Amazon will continue to shake up — and maybe even dominate — the world of grocery, and that announcement, two years ago, will prove to have been just the beginning of some major disruptions.