Why Amazon's Whole Foods deal is so dangerous

Anyone who has been following Amazon over the last few years — and especially the last few weeks — will have noticed the online retailer’s tentacles steadily creeping out of its digital confines and into territory that physical retailers considered untouchable: supermarkets.

Grocery shopping was always under the surface of the ill-fated Amazon Fire Phone (which could scan and order products from their bar codes), to Dash Buttons (which focused on kitchen and bathroom products), to unmanned concept stores and more. The most blatant move was the recent launch of AmazonFresh Pickup, a grocery ordering and delivery service, but even that was limited by its sparse retail presence.

Until today, those moves seemed like cautious pokes at the deeply ingrained habit of going to a store and paying with a plastic card. Furthermore, any competitors may have seen Amazon's lacking retail store presence as a buffer that kept them at least temporarily safe from the same fate that befell the bookselling world. How naive they were.

Clearly Amazon's $13.7 billion deal to buy Whole Foods marks a seismic shift in the retail and payments landscape which, at the time of writing, has rival grocery and superstore chain stocks in freefall.

David Ryder/Bloomberg

Could the Whole Foods deal have been predicted?

This huge head fake from Amazon may have been well planned, much like Walt Disney's use of fake names to buy up land in Florida on the cheap ahead of the announcement of Walt Disney World — everyone looked at Disney's smaller theme park in California and assumed that was where his attention was focused.

Just two weeks ago, Amazon announced that it was going live with its AmazonFresh Pickup store, with two locations near its base of operations in Seattle — hardly something to keep executives at Walmart and Target awake at night, though they certainly took notice. Amazon also announced an expansion to its line of Echo home assistants that would potentially provide more interactivity and cross selling opportunities, but still nothing that indicated a leap into the physical world.

However, this week there were three announcements from Amazon that indicated that something larger was afoot.

Connecting the dots

The first was the announcement that Amazon was going to incentivise Prime customers to join a new rewards program where customers who register a debit card and bank account earn a 2% cashback each time they reload their Amazon ‘Gift Card’ account. With the average Prime customer spending $1,300 per year, a $26 cash back may not seem significant enough to get members to enroll.

However, the debit rewards program was part of an ongoing effort on Amazon's part to provide options to shoppers who prefer cash and debit (and thus probably favor those options when buying groceries). It pairs well with May's launch of Amazon Cash, which allows cash loading to Amazon for online shopping and more recently, Prime membership for low-income consumers at the discounted rate of $5.99 per month. For shoppers with limited access to credit card rewards, a 2% cashback would be far more compelling, particularly when accompanied by free delivery.

Within the last day, two other pieces of news were released by Amazon - the availability of an updated Amazon Dash Wand and, rather tellingly, a patent granted to Amazon to block in-store showrooming on smartphones.

Amazon Dash Wand allows consumers to scan bar codes from home, or enter orders verbally using Amazon’s voice assistant platform, Alexa. For Amazon Prime members, the device is essentially free - it costs $20 to purchase, but Amazon then adds $20 back to the customer’s Amazon account. Amazon also throws in a 90 day free trial of AmazonFresh home delivery.

Amazon’s patent, named "Physical Store Online Shopping Control," examines what a person is searching for when connected to a retail WiFi network and can determine whether the shopper is searching for a competitor's item online and take subsequent action such as blocking access to the content, redirecting to Amazon’s online store or sending a sales representative to talk to you.

Combined, these initiatives all telegraph that Amazon is deadly serious about competing in grocery delivery and physical retail, even to the point of patenting ideas that will protect it against other retailers using its own tactics.

A genuine threat to traditional retail?

The response from grocery chains to Amazon encroaching on their turf has ranged from the sublime to the ridiculous, particularly for Walmart.

In August 2016, Walmart purchased the online retailer Jet.com for over $3 billion as a means of directly bringing the fight to Amazon’s online business. It also pushed back with innovation projects such as unstaffed pick-up locations for groceries and the Seinfeld-esque staff grocery delivery pilot. However, many of these initiatives by Walmart and others can be characterized as reactive rather than proactive to the incoming threat of Amazon.

Amazon’s purchase of Whole Foods marks a turning point in the fusion of online and offline retail. For the largest grocery chains, this may not present much of a threat at this time, particularly since Walmart has ten times the locations of Whole Foods in the U.S.

Further, Whole Foods is aimed at a demographic that may present an overlapping Venn diagram of current Prime members, but it hardly represents the broader U.S consumer demographic that Amazon is seeking to acquire (it is colloquially known as “Whole Paycheck” for a reason).

Nonetheless, the reality is that grocery chains are handicapped by legacy technology, excess real estate and radically changing consumer attitudes to shopping. Amazon has the advantage of rebuilding retail from scratch, learning from the mistakes of others and scaling organically.

Given the plummeting value of this segment in the wake of today’s news, the Whole Foods acquisition could be the beginning of a real-world game of Monopoly by Amazon, picking off the competition for firesale prices.

What do you think? Senior Analyst Nick Holland welcomes your feedback in the comments below or at nick.holland@sourcemedia.com