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Aug 2017

Amazon’s Purchase of Whole Foods Changes the Game

Amazon’s move to buy Whole Foods in June for $13.7 billion wasn’t just shocking; it has the potential to shake up the retail industry and even the way businesses buy and sell other companies.

For one thing, Amazon itself is stepping far outside its normal pattern for acquisitions, generally sticking to far smaller targets.

In 80 previous acquisitions, “Amazon has eschewed big takeovers. The biggest deal thus far has been the 2009 purchase of online shoe retailer, for roughly $1.2 billion—dwarfed significantly by the Whole Foods announcement,” Howard Yu, a professor of strategy and innovation at IMD Switzerland, writes in Forbes.

Yu explains that M&A typically occurs because a company is (a) trying to improve performance in a mature industry by consolidating capacity and improving efficiency to achieve greater economies of scale at lower cost, (b) extend geographic or market reach, or (c) fend off future disruption or invest in an intriguing but unproven business strategy.

“Viewed in this light, Amazon’s purchase of Whole Foods is truly in a class of its own. None of the conventional reasons can explain the acquisition,” Yu writes.

In essence, Amazon is buying an entire new product line (fresh produce), one replete with a customer base that has a pretty fat wallet. And Amazon will be able to apply its quality customer service and data-driven approach to that new, promising swath of the market.

“What Whole Foods provides is a 456-store-strong footprint across the U.S., Canada, and the U.K., together with a customer base that is affluent—as reflected in their price points; urban—as revealed in their store locations; and adventurous—as evidenced by their merchandise mix,” says Yu.

“I can’t even begin to fathom the infinite possibilities whereby Amazon could start remodeling every single aspect of Whole Foods’s operations…. Never in business history have we seen a single company with so wide of a scope in its operations, so deep of its analytic capabilities, and so committed to embark on such a bold experiment. It’s set to reinvent the retail industry as we know it.”

Chris Gagnon, The Council’s CIO, says in the July issue of Leader’s Edge magazine that the Amazon-Whole Foods deal is a warning to the business world that the old ways of sales and customer service are changing forever.

Gagnon explains that retailers rely on the ability to track people’s buying patterns and then consistently provide the personal experience they desire. “Creating the exact experience you want every time results in your becoming a predictable, consistent spender,” he says.

“The retail industry and especially the grocery industry run off of a tremendous amount of data,” Gagnon says. “In fact, from a data perspective the larger retailers are some of the most technically astute companies around.”

But for brick and mortar grocery stores, that approach may not be enough to keep up with an Amazon-Whole Foods behemoth.

“For as much as they know about your family and the factors that encourage you to buy in a consistent way, they still need you to get in your car and go to their store,” Gagnon says. “As the power of predictive sales analytics combined with ease of use and on-demand service spreads through more industries, traditional retail sales will become a thing of the past.”

Gagnon says insurance brokerages have to wake up to the new reality being shaped in the rest of the business world and start figuring out how to make buying insurance an easier, frictionless process. And the industry shouldn’t make the mistake of thinking that technology is the key to success.

“This isn’t really a tech play. It’s all about market intelligence. It’s about reducing friction and creating a consistent buyer,” he writes.

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