Bob's Gutsy Leadership Blog

Amazon: A Rare Strategic Mistake?

Whole Foods’ first store opened in 1978 in Austin, Texas.   National expansion began in earnest in 1984 and it has grown to 500 stores in North America.    In October of 2017 it was acquired by Amazon. Whole Foods’ amazing growth was due to three points of differentiation that it used to attract its unique customer set:

  • Natural Organic Foods – Whole Foods was the first and only USDA Certified Organic food chain, and customers were taught that what is good for them is foods free of chemicals, artificial colors or flavors, preservatives, etc.  It basically put organic on the map!
  • Regional Distinctive Items – Local Whole Foods managers were encouraged to stock in their stores small local/regional brands that were very distinctive, matched the natural/organic/fresh positioning, and had very high profit margins. 
  • Discriminating Customers – They developed a cultlike reputation of being the store for the educated, upscale, health-conscious customer.

A lot has changed in the marketplace since the Amazon acquisition, and the Whole Foods business is currently suffering.  Here are the key reasons:

  • Now Organic, Healthy-Food Offerings Are Everywhere – The big grocery chains love selling such products, with their much higher profit margins.
  • Amazon and the Virus Are Driving Fast, Efficient, Online Ordering – The online-ordering-and-pickup business at Whole Foods is making progress but it lags the big grocery chains.  Online ordering is quite different than the experience of the classic Whole Foods shopper.  It is about speed and efficiency.  You are not selling the traditional Whole Foods experience (no distinctive items or incredibly attractive produce driving unplanned purchases). Hence, it is inherently not that attractive to a lot of Whole Foods customers-of-old.
  • No More Local, Store-Level Decision Making – Amazon has moved Whole Foods to central decision making, so those distinctive regional items are disappearing, along with their lush profit margins.  No more unique offerings that were very appealing to the Whole Foods loyalists.
  • A Low Priority for Amazon – Amazon is all about disrupting via technology.  Surprisingly, Amazon seems to be putting all of its push in the technology area into its new grocery chain it is launching called Amazon Fresh, with the stores jam-packed with the latest tech wizardry such as checkout via just putting things in your cart, Alexa telling you which aisle things are in, and if you choose, fast efficient ordering online with quick delivery.

The result is Whole Foods is suffering badly, and they can’t blame it all on the virus.  They are trailing all the key players like Walmart, Kroger, and Trader Joe’s in online sales, store traffic, and total revenue.  For example, store traffic was off 25% versus year ago in September, far lower that even its most direct competitor Trader Joe’s, and with some of the big chains showing growth versus year ago.

Long time grocery industry consultant Bill Bishop summarized the situation this way: “Amazon’s purchase of Whole Foods, in retrospect, was probably a strategic mistake.”

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