Why did Amazon buy Whole Foods? World domination.
Amazon’s New Customer is a really great analysis by Ben Thompson of Amazon’s strategy and why Amazon bought Whole Foods: they purchased a new customer for Amazon infrastructure, not a retailer. Early on in the piece, Thompson lays this one on us:
Amazon’s goal is to take a cut of all economic activity.
No qualifiers. All economic activity. In the world. Sort of a Dutch East India Company for the internet age. Thompson explains how they’re going to do it and why fresh food is such a strategic hole for them.
As you might expect, given a goal as audacious as “taking a cut of all economic activity”, Amazon has several different strategies. The key to the enterprise is AWS: if it is better to build an Internet-enabled business on the public cloud, and if all businesses will soon be Internet-enabled businesses, it follows that AWS is well-placed to take a cut of all business activity.
On the consumer side the key is Prime. While Amazon has long pursued a dominant strategy in retail — superior cost and superior selection — it is difficult to build sustainable differentiation on these factors alone. After all, another retailer is only a click away.
This, though, is the brilliance of Prime: thanks to its reliability and convenience (two days shipping, sometimes faster!), plus human fallibility when it comes to considering sunk costs (you’ve already paid $99!), why even bother looking anywhere else? With Prime Amazon has created a powerful moat around consumer goods that does not depend on simply having the lowest price, because Prime customers don’t even bother to check.
This, though, is why groceries is a strategic hole: not only is it the largest retail category, it is the most persistent opportunity for other retailers to gain access to Prime members and remind them there are alternatives. That is why Amazon has been so determined in the space: AmazonFresh launched a decade ago, and unlike other Amazon experiments, has continued to receive funding along with other rumored initiatives like convenience store and grocery pick-ups. Amazon simply hasn’t been able to figure out the right tactics.
When I heard about the Whole Foods deal, the first thing I thought about was Amazon Go. The company has been trying to experiment with different retail environments, but without the proper scale, it doesn’t make a lot of sense. Whole Foods gives them a chance to develop their fresh food delivery infrastructure at scale…so that they can offer it to other customers just like they do with AWS.
P.S. Whenever I think about Amazon as a business, I recall this 2012 post by Eugene Wei on Amazon’s low-margin strategy. I suspect Thompson’s post will join it in my thoughts.
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