Case Study:
Can Amazon Trim the Fat at Whole Foods?
WHEN FOUR YOUNG entrepreneurs opened a small natural-foods storein Austin, Texas, in 1980, they never imagined it would one dayturn into an international supermarket chain with stores in theUnited States, Canada, and the United Kingdom. Some 35 years later,Whole Foods has about 450 stores, employs 85,000 people, and earned$16 billion in revenue in 2016.
Whole Foods' mission is to offer the finest natural and organicfoods available, maintain the highest quality standards in thegrocery industry, and remain firmly committed to sustainableagriculture. The grocery chain differentiates itself fromcompetitors by offering top-quality foods obtained throughsustainable agriculture. This business strategy implies that WholeFoods focuses on increasing the perceived value created forcustomers, which allows it to charge a premium price. In additionto natural and organic foods, it also offers a wide variety ofprepared foods and luxury food items, such as $400 bottles of wine.The decision to sell high-ticket items incurs greater costs for thecompany because such products require more expensive in-storedisplays and more highly skilled workers, and many items areperishable and require high turnover. Moreover, sourcing naturaland organic food is generally done locally, limiting any scaleadvantages. Taken together, these actions reduce efficiency anddrive up costs. The rising cost structure erodes Whole Foods'margin.
Whole Foods Market:
Stuck in the Middle
Given its unique strategic position as an upscale groceroffering natural, organic, and luxury food items, Whole Foodsenjoyed a competitive advantage during the economic boom throughearly 2008. But as consumers became more budget-conscious in thewake of the deep recession in 2008—2009, the company's performancedeteriorated. Competitive intensity also increased markedly becausebasically all supermarket chains and other retailers now offerorganic food. As a result, sales performance of existing WholeFoods stores ("same-store sales," an important performance metricin the grocery business) has been declining since 2013. Overall,Whole Foods Market has sustained a competitive disadvantage,underperforming not only its competitors, but also the broadermarket by a wide margin. Over five years, Whole Foods Marketunderperformed the broader stock market by some 200 percentagepoints!
To revitalize Whole Foods, co-founder and CEO John Mackeydecided to "trim fat" on two fronts: First, the supermarket chainrefocused on its mission to offer wholesome and healthy foodoptions. In Mackey's words, Whole Foods' offerings had included "abunch of junk," including candy. Mackey is passionate about helpingU.S. consumers overcome obesity
to help reduce heart disease and diabetes. Given that, the newstrategic intent at Whole Foods is to become the champion ofhealthy living not only by offering natural and organic foodchoices, but also by educating consumers with its new HealthyEating initiative. Whole Foods Market now has "Take Action Centers"in every store to educate customers on many food related topicssuch as genetic engineering, organic foods, pesticides, andsustainable agriculture.
Yet, a 2015 mislabeling scandal in New York—in which cityofficials found that Whole Foods had mislabeled weights of severalfreshly packaged foods such as chicken tenders and vegetableplatters, leading to overcharges of up to $15 an item—reinforcedthe public's image of Whole Foods as overpriced. Mackey made avideo apology and said this was an unfortunate but isolatedincident caused by inadvertent errors of local employees. He alsoemphasized that the problems were found in only nine out of 425stores (at that time).
Second, Whole Foods is trimming fat by reducing costs. Toattract more customers who buy groceries for an entire family orgroup, it now offers volume discounts to compete with Costco, themost successful membership chain in the United States. Whole Foodsalso expanded its private-label product line, which now includesthousands of products at lower prices. The company also launched anew store format, "365 by Whole Foods Market," based on its "365Everyday Value" private label. The 365 stores focus exclusively onWhole Foods' discount private labels, primarily to address the riseof discount competitor Trader Joe's. The risk, however, is thatthis strategic initiative will cannibalize demand from the higherend Whole Foods Markets, rather than taking away customers fromTrader Joe's. To offer its private label line and volume-discountpackages, Whole Foods is beginning to rely more on low-costsuppliers and is improving its logistics system to cover largergeographic areas more efficiently.
Mackey indicated that he planned to grow threefold in the futureand believes the United States can profitably support some 1,200Whole Foods stores. Larger scale and more efficient logistics andoperations should allow the company to drive down its coststructure.
Whole Foods got stuck in the middle. It was outflanked on thelow end by national grocery chains such as Publix or Kroger thatoffer a wide variety of organic foods at lower prices. At thehigher end of the market, Whole Foods Market was outperformed inurban centers by more specialized grocery stores focusing onspecific segments such as seafood, meats, breads, cheese, orwines.
Amazon Acquires Whole Foods
Mackey's turnaround initiative failed. This became more apparentas activist investors honed in on Whole Foods' poor performance andhighlighted the strategic shortcomings of the organic grocerychain. Even though Whole Foods Market attempted to strengthen itsstrategic position and also changed its board of directors,bringing in more large-chain retail experience, it was too little,too late. In 2017, Amazon acquired Whole Foods Market for close to$14 billion.
With the acquisition of Whole Foods, Amazon continues itsvertical integration along the value chain into physical retailspaces. Two aspects about this acquisition are particularlynoteworthy. First, the Whole Foods acquisition is 10 times largerthan any other acquisition the Seattle-based technology firm hasundertaken (its second-largest acquisition, Twitch, a live-videostreaming site was acquired for less than $1 billion in 2014).Second, Amazon chose to make an acquisition in the grocery businessand not in any other retail space. Why?
Amazon already dominates categories such as consumerelectronics; therefore, it has no need to acquire a retail outletsuch as Best Buy. The Whole Foods acquisition also offers Amazon aslew of new benefits: The organic grocery has a national footprint,which allows the ecommerce firm to test its latest technology on amuch larger scale. For example, it has experimented with Amazon Go,a grocery concept without checkout counters. Shoppers fill theircarts, and software automatically tallies the bill and deducts itfrom the person's account. This technology could be rolled out atWhole Foods Market. Amazon will also be in a position to gathermore data about shopping behavior. Grocery shopping is aparticularly important need for consumers, and Amazon reasons ifshoppers start associating groceries with Amazon, they will want tobuy other items online also. In addition, Amazon is notoriouslycost conscious. Bringing down the cost structure of Whole Foods byapplying Amazon's world-leading logistics technology couldsignificantly strengthen the grocer's strategic position.
Finally, Amazon bought Whole Foods to compete more effectivelywith Walmart. The largest physical retailer in the world is thelargest U.S. grocery chain, accounting for some 15 percent marketshare. In addition, the grocery business is Walmart's mostprofitable, and is the strongest draw for customers to the big-boxstores. In recent years, Walmart has been more aggressively movingto combat Amazon's dominance in ecommerce. The Bentonville,Arkansas, retail chain purchased Jet.com for more than $3 billionin 2016, just one year after the site was launched. Jet. comoffered lower prices than other retailers, expecting that manyconsumers would be willing to wait a bit longer for theirshipments. The entrepreneurs were correct in making thisassumption. In addition, Jet. com's strategic approach wastailor-made to enhance Walmart's online presence. Walmart.com hasbecome a star performer as the site's user-friendliness hasimproved. Walmart has also been at the forefront of implementing ahybrid retail concept where consumers order goods online and pickthem up in stores.
The stage is set for a battle of the retail giants, with thenumber-one old-line physical retailer in one corner of the ring andthe ecommerce leader in the other. Stay tuned!
DISCUSSION QUESTIONS
1. Why was Whole Foods successfulinitially? Why did it lose its competitive advantage andunderperformed its competitors?
2. Why did Whole Foods end up being"stuck in the middle"?
3. What changes do you expect at WholeFoods following the integration with Amazon?
4. Why did Amazon acquire Whole Foods?What are some operational and strategic reasons for this decision?Do you think the Whole Foods acquisition was a good move forAmazon? Why, or why not? Explain.
(Must be at least 2 pages long)
