Will Whole Foods Be Amazon's Waterloo?

Authored by Mark St.Cyr,

Although the Battle of Waterloo means different things to different people, one of the more widely held meanings it’s come to represent is something along the lines of a battle that one side held certain of victory, only to not only be beaten, but then lose everything they had fought for to begin with. This is what ended Napoleon, but it wasn’t for that he had no plan. On the contrary, he just believed his plan wouldn’t fail. That plan was: isolate, and annihilate, each army separately. (e.g., the Allied and Prussian armies.)

If you interchange “armies” for “business sectors”, Amazon’s strategy over the last few years seems much aligned. i.e., War against big-box retail, then all retail, media, spacecraft, and now – retail food shopping. I am of the opinion Amazon™, much like Napoleon, are going to find this battlefield has far more challenges that may end up costing them far more dearly, than they ever bargained for. Here’s why…

Unbeknownst to most, when it comes to the perishable food segment, the regulations and more (i.e., meat, dairy, et cetera) that allow what we American’s take for granted when it comes not only to variety, but for the safety and assured wholesomeness that our food supply is – it’s unlike anything most retailers outside of the industry have ever encountered. Let alone understand.

The ones whom find it the most difficult to acclimate to; are those who are all ready in the retail business (think: department store mentality) and believe it’s all just a case of applying what they know, or what they perceive as “what they know”; and switch it out using a shelf full of, let’s say toys, for a shelf full of steaks, as an example.

Many believe the only difference (an assumed difference) is that one shelf is refrigerated, yet, all the rest is the same. i.e., You have a product, a price, a label, a way to accept money for it, and a place to store back-stock. Sounds easy-peasy right? And that’s the problem, it sounds like it. But it’s anything but in the real world.

The reasons why I know this to be true is because this was the industry I made my marks in. i.e., The meat industry. And when it comes to what Amazon is going to have to contend with going forward I can speak directly to that because (using a hypothetical) when Amazon will be looking to make “deals” or “set up a supplier”, I would be the one on the other-side of the table they would need to negotiate through. And yes, I’ve actually done it, at that level. So I know intimately what I’m talking about, which is why I’m making this case.

This isn’t going to be the first time some retail behemoth decided they were going to get into the “food” market and show the industry a thing or two on how “they” believed the complex should run. It’s been done before, only to have their management sent packing arse-in-hand, shell-shocked, and mumbling for days, “WTF just happened there? Don’t they understand who we are?!” I’m referring to Walmart™ and their initial foray into groceries.

At about the turn of Y2K Walmart entered into the “supermarket” business with gusto. At the time they were gaining quite the reputation for negotiating (more like strong arming or bullying) food suppliers. (think “prepared” like: canned, or boxed product, sodas, etc., etc.) And when they were through – they set their crosshairs on the fresh meat suppliers. (think: steak, chicken, et cetera.) And it was here where they heard what seemed for the first time in response to their: “You’ll do it our way, and at our price, or no way!” demands. That response?

“Take a hike, a don’t let the door hit you on the way out. Oh, and welcome to the meat business.”

The meat industry was the only industry that (at least to my knowledge) sent Walmart reeling with no way for recourse other than to deal on meat industry terms and pricing. In other words Walmart’s “size” or “buying power” wasn’t a dominating factor that could gain leverage for discount. In fact – it could actually work against them, something considered unfathomable to its product buyers. I’ll give you a quick example to help clarify.

If a company wants to purchase 1mm widgets they can find a factory that already has supply with excess inventory if needed (or can ramp up) and negotiate a price. Simple construct for this example. Now: want to buy 1mm pounds of meat?

If there’s some available on the spot market, fine. If not? What are you going to do – make it?

You can – but – that takes well over a year. And here’s the other key – 1mm pounds how often? Daily? Weekly? Monthly? And if you begin buying all the “spot” available? Guess what? Prices may go up for you – and not your competition. For your competition may already be locked into long-term contracts. And what can be even more baffling to the uninformed is this: All your competitors will have it, as in product – and you won’t. Maybe at any price.

Again, it’s a different business. And in the end it took them (Walmart) years with a lot of painful trial and errors as to try to innovate pricing and suppliers for differentiation. Today, if you look at meat prices from their cases comparing to any other (in my opinion) they’re basically right in line with any other national retailer. You don’t see any “WOW!” type price discrepancies unless, it’s a sale item.

The above thumbnail sketch is important, because it will help explain why this, Whole Foods™/Amazon merger might come into resistance not only from the competition, or suppliers. But also – from its existing customer base.

Whole Foods (WF) has garnered the moniker “whole-paycheck” for as long as I can remember, and with good reason. As I stated, being in the food industry for most of my career, when I walk around any supermarket, it’s with a far different eye than most, especially when it comes down to pricing. And WF has never ceased to amaze me.

I am always stunned (again, all my opinion) at the prices being paid by its customers. But there’s a reason for this. And it’s not what most people think. The reason why people pay those exorbitant prices is because of what they deem as some form of “exclusivity” shopping there gives them. e.g., They are showing they can afford it.

Sure, some may say the ambience is better than most other national stores (although I would argue today, that’s far from true) and there’s certainly a different product selection than others. But that’s everywhere. But where the rubber-hits-the-road (i.e., the meat department) all I’ll say too that is: I go “WOW!!!” But not for the reasons WF would like. Which brings me to my point.

WF customers aren’t buying there because of some form of pricing structure that lends itself to discounting. In actuality – it’s the exact opposite.

There are now multiple competitors surrounding many a WF that offer the same type of “wholesomeness” implied by shopping there. One example that’s in my own area is called FreshThyme™ (FT), and I’ll use them to demonstrate my point using a friend of my wife.

Her friend shops WF, but within the last year FT opened here less than 2 miles away from her recently opened WF about a year prior. My wife took her around the store where she purchased similar items as her go-to store. But this time her bill was noticeably cheaper. And I mean much, as in even she was quite surprised. Did she switch? Has she been back there again? Answer: No. And here’s where you begin to understand where I’m going.

Why hasn’t she? Is it because she doesn’t “need” or care to save money? Again, the price differences were not nickel and dimes, but rather, dollars on many items. Was it the “2 miles away” that did it, because we’re all such creature of habit? The answer again is no, because she doesn’t even live in this town, she actually lives some 20 miles outside. But location is the key. And here’s why…

The new WF was built in what is known in my area as “Easton.” It is a very exclusive retailing area. To give you an idea, if you’re walking around the shops and suddenly you have an impulse to buy a Tesla™ after your dinner at Smith & Wollensky™, you can do just that by crossing the walkway. And if you want to celebrate that with some one-of-a-kind key ring? Tiffany™ is right there to accommodate you along with many others. All within a manageable stroll – even if you’re in heels.

Why this is important is this: You are not going to gain market share, or customers, via the discounting model. It just doesn’t work that way to this clientele. And that is an “Achilles heel” to any management team coming from a “race to the bottom” pricing model, which Amazon is. And that leads to the following for consideration.

What advantages does Amazon bring to the WF concept model? Pricing? Management? Logistics? I would argue they aren’t relevant. And actually, the mindset of current senior management at both companies are in for a culture shock that will surely be epic. Imagine the meetings that will be discussed (as in shouting matches) on why reducing prices doesn’t work, or not spending money for a key display in an effort to cut costs, not understanding (or listening to reasoning) that reducing the display purely for “cost” might reduce actual sales.

I’ve seen it happen, and I know how they turn out. All I’ll say is this: not good.

Walmart was a different animal, for they already had brick and mortar stores – adding on a grocery store to existing models was (for lack of a better term) a natural fit. But it has been anything but the slam dunk many first envisioned. Especially Walmart itself.

WF is different, for it is a stand alone market. It has to fight to get (let alone retain) every customer into its store for a specific purchase. There’s no “We’ve got TV’s, and furnishings over here, toys over there. Oh, and now you can shop for groceries also!” e.g., There is no other reason to go to WF than to buy at WF. And they don’t go there because it’s cheaper than the competition, far from it.

If the culture of Amazon doesn’t mesh properly with the now management of WF the resulting missteps that may send customers once loyal elsewhere to shop alternatives (and they’re everywhere) could unfold faster than a next day delivery. And if you’re looking for further clues of where such missteps can happen, look no further than what is currently unfolding at the Washington Post™.

Again, this is the type of “culture shock” that typically takes place when an “outsider” comes in, and its management team (along with style) tries to impose what it now deems as “policy” going forward. More often that not the backlash that result over time begins to cripple the management of both. This WF deal could add to that already mixing cauldron.

Maybe the best indication of where this might all be going comes from none other than what is surely this whole war’s leading general. e.g., Rodney McMullen, CEO of Krogers™. To wit:

“Whole Foods is a ‘good fit’ for Amazon.”

I believe Wellington said something similar as he watched Napoleon deploy his troops. But that’s pure speculation.

Comments

hedgeless_horseman Mon, 07/17/2017 - 12:00 Permalink

 Napoleon hated bankers, which is why they came together and funded an army to defeat him. 

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” -Napoléon Bonaparte
Lore Cynicles II Mon, 07/17/2017 - 15:51 Permalink

The article is awkward and verbose, arduous to read, but there are good seeds that beg for more detail. One point that didn't get made is that Whole Foods is unique for its geographical distribution. Basically, it's spread out more widely than other grocers, so if the goal is to maximise broadest-possible market penetration, that's a positive.The author suggests that shoppers who are loyal to Whole Foods choose to shop there because of some perceived "prestige value" that makes it more attractive than other grocers.  That may seem stupid to ZHers, but nothing else makes any sense.  You certainly don't shop there to save money, especially not for staples.  As an outsider, I find it hard not to view Whole Foods shoppers with contempt.  Their ability to measure and shop for value is broken.  And yet, the stores are BUSY!  With such dysfunctional shopping habits, no wonder consumer debt is soaring. Dairy and meat are dominated by anti-competitive cartels, essentially mafia.  I've posted before about a local pizza operator in Canada who was threatened with his life by three strongmen late one evening many years ago, shortly after he opened, because he dared to purchase his cheese from a local supplier, rather than from the cartel out of Montreal.  They bragged: "ALL the pizza cheese comes from us, or we shut you down."  There is no pricing flexibility in a cartel.  Maybe the intent is eventually to monopolize the entire grocery sector. That would explain the obvious lack of interest in competitive pricing. IMO, the future of Whole Foods is already written.  They'll go the way of the department store.  One does not compete on the basis of some warped sense of "prestige value."  Offer better prices than the competition, or die.

In reply to by Cynicles II

Never One Roach City_Of_Champyinz Mon, 07/17/2017 - 12:33 Permalink

Is Organic Food Really Safe? The Real Story! If you like the taste of organic food and have the extra money to spend, go for it. However, don't consider it a necessity. When choosing the foods to include in your diet, the first consideration should be a well-balanced diet. Whether it comes from conventional foods or organic foods has little significance.  https://www.bodybuilding.com/fun/real-story-of-organic-foods.htm

In reply to by City_Of_Champyinz

Bastiat Never One Roach Mon, 07/17/2017 - 14:13 Permalink

About 30 seconds in:  "Cancer benchmarks were exceeded by 100% of children for arsenic, dieldrin, DDE and Dioxins."Exceeded by how much?  100X for Arsenic, closer to 1000X for Dioxin. Last year about 30 million pounds of antibiotics were fed to chickens.Yum Yum. It seems reasonable to avoid as much of these toxins as possible. https://nutritionfacts.org/video/where-does-the-arsenic-in-chicken-come…

In reply to by Never One Roach

The Ram Looney Mon, 07/17/2017 - 12:35 Permalink

From the view in south, Florida, WF's is losing it.  High quality alternatives abound these days, especially since Cosco and others are adding many organic foods at far better prices.  Yes, there will always be a 'snob' appeal to WF's.  I use to shop there all the time with the Mrs., but after she retired, the 'snob' appeal had to end for financial reasons.  My own view is that America is growing poorer.  Even those in the proverbial 1% may not have a lock on everything for life.  This is one acquisition I would not bet on unless their is some huge value added that Amazon could bring.  Maybe, air drop your Kobe steaks by drone?  Not for a while anyway.

In reply to by Looney

Graph Looney Mon, 07/17/2017 - 14:27 Permalink

You just covered my coment that I was to make on:"Unbeknownst to most, when it comes to the perishable food segment, the regulations and more (i.e., meat, dairy, et cetera) that allow what we American’s take for granted when it comes not only to variety, but for the safety...."

In reply to by Looney

CPL Mon, 07/17/2017 - 12:03 Permalink

Tesla will be the real reason once their channel stuffing scam bubble bursts, but they'll blame it all on Whole Foods to throw the ownership of blame away from the obvious Tesla motors onto a retailer that wasn't doing so good in the first place.  Saves face of "Musk Ox" and throws the other owner under the bus in the press.

Hope Copy Mon, 07/17/2017 - 12:08 Permalink

When Walmart got into the food business, it was tough going and there was talk of them getting out..  Amazon's business model is totally out of line with this industry and they would be best leaving the acquisition whole with management in place and try to spin off anything new as a partner business (so it doesn't take down the ship).  Amazon still needs to pay a decent dividend to the stockholders, or start running political candidates as hard core socialists, because their present business model is right out of the Karl Marx playbook...

E. Phil Chew Mon, 07/17/2017 - 13:19 Permalink

Whole Foods being Amazon's waterloo ?..... Maybe, maybe not.But this sure as hell can be:Amazon Considering Allowing Developers Access To Alexa Transcripts.Link is to Breitbart.And as the top comment on that page offers rather succinctly, "Anyone who has one of these in their house is a pure idiot".

ZenMoment Mon, 07/17/2017 - 12:09 Permalink

yeah dude, the people over amazon didn't consider the points you make here. give me a break lol. and comparing amazon to walmart's experience in the biz, cmon. this article gives an elementary anaylsis. amazon bought whole foods for the data, plain and simple. soon enough amazon will know exactly what you eat, all your eating habits and other grocey store purchases; will know when you run out of them and when you need more and be able to read trends more accurately in the industry. tell me what other company in the world would be able to capitalize on this data more so in a tranfomative way?

Cordeezy (not verified) Mon, 07/17/2017 - 12:10 Permalink

It is unlikely they will run Whole Foods as a grocery store solely.  if they turn the stores into smaller fulfillment centers they were going to build anyway, then it will be a net positive for Amazon www.escapeamazon.com 

Righttoarmbears Mon, 07/17/2017 - 12:21 Permalink

Amazombie have been trying to buy ocado (UK)  on and off for the last 4 years because they have the most advanced automated food picking system available, its quite a good trade every time the rumours start the stock jumps a good 10% managed to ride it a few times, but having read a lot of the sub text as to why Amazon are so interested, its because they have had several attempts at their own picking system of food delivery that has failed miserably, so unless they have overcome that significant hurdle they are just trying to buy into the market another way, will be interesting to see how they handle having to pay state taxes and other inconveniences that trading in the real world brings :)