What Amazon’s Whole Foods Acquisition Means for Retailers

We’ve all seen the landmark acquisitions happening this summer: Amazon.com announced its $13.4 billion purchase of Whole Foods, and Wal-Mart is building out its online retail fashion business by buying Bonobos.

The recent buying spree is no coincidence. Very few retailers have a full understanding of both online and brick-and-mortar, but the new reality is that they must perfect both to win. As more retailers realize this, expansion by acquisition will be a key growth strategy, as building new capabilities in-house is too time consuming and expensive to be feasible. While Amazon continues to blaze the trail for the retail industry at large, it’s important to understand the Whole Foods buy — and what it implies for the future of the retail industry.

The logistics advancements and enhanced capabilities enabled by this acquisition will force the market to take a quantum leap forward. Customers will grow to expect wider product assortments, more appealing pricing strategies, better service and increased personalization. Retailers that can’t deliver on these demands will be quickly edged out of the market.

Here’s how Amazon’s acquisition of Whole Foods will benefit both companies, and why more big-name brands and retailers are looking to acquire instead of grow new capabilities organically.

Strategic Acquisitions Enhance Omnichannel Capabilities

Omnichannel is the name of the game. While Amazon has already stepped up its brick-and-mortar strategy with physical bookstores and prototype Amazon Go locations, the Whole Foods acquisition is an enormous leap that empowers the company to dominate both online and in-store. This acquisition gives Amazon the ability to reduce its cost of operations by providing the warehouses and logistics necessary to not only expand areas of service, but do so more cost effectively compared to building new infrastructure focused on grocery.

It makes sense for Amazon to buy a successful brick-and-mortar retailer to combine online and offline insights, with the end goal of providing a true omnichannel experience to consumers. Since customers expect omnichannel integration and convenient features like click-and-collect, real-time inventory transparency options and more, this acquisition is a step in the right direction for both companies.

2 Heads Are Better Than 1

Acquisitions eliminate the legwork and mitigate the risk of building entire new divisions for new markets. The industry is moving too quickly for manufacturers and retailers to develop new capabilities in-house. While Amazon certainly has the cash to create a robust grocery infrastructure, it’s faster and easier to purchase a trusted grocery chain. Along with Whole Foods’ customers, Amazon also gets the company’s expertise in fresh produce, prepared foods and consumer trust in quality goods while potentially enabling it to expand its Fresh offering even quicker.

Knowing Amazon, it won’t stop there. The acquisition provides opportunities for the company to capitalize on the growing meal delivery kit phenomenon, expand its brick-and-mortar presence and use Whole Foods stores as nodes in a cold-chain (temperature-controlled) fulfillment network. With access to Whole Foods’ point-of-sale and consumer behavior data, Amazon further improves its marketing and business strategies to better serve its wider audience and capture a higher share of their wallets.

We can also expect an influx of innovation. With Amazon’s insight into what consumers are looking for online and a complete view of what they're purchasing offline, the retailer can easily identify white space in the marketplace and start innovating. These innovations will range from sure bets, with at least a significant portion of products falling under its private label, to more experimental, regional products that can be rolled out and tested quickly. This innovation stream, in turn, will enrich and redefine assortment and put significant pressure on manufacturers and retailers to keep up.

With New Brands Come New Audiences

Traditional wisdom dictates that brands and retailers should focus on servicing their target customer, without wasting money on the people they can’t reach or retain. However, acquiring new businesses allows them to reach new consumer segments without the growing pains of building attractive offerings from scratch.

Wal-Mart’s Bonobos acquisition is an obvious example of this strategy. Now, the retail chain has increased reach over the attractive millennial market, who might shop regularly at Wal-Mart but occasionally splurge on a purchase at Bonobos. This not-so-obvious marriage allows Wal-Mart to gain a higher share of wallet from millennials by giving them exactly what they want — the opportunity to save and to splurge.

And while Amazon’s loyal Prime audience might overlap with Whole Foods core customers to some degree, this acquisition gives Amazon a huge new market reach. According to Astound Commerce research, 80 percent of the 47 million households in the U.S. with income higher than $75,000 buy at least one CPG category online. Forty-five percent buy groceries online, spending an average of $5,000 a year. With this group already comfortable purchasing goods online, Amazon is in a great position to convert these wealthy shoppers into committed customers and gain a significant share of their $100 billion annual spend.

Competitive Pressures Will Completely Redefine the Grocery Space

Big-name grocers like Kroger and others will come under even greater pressure as Whole Foods incorporates new in-store technology and integrates Amazon’s relentless focus on leading the market. We may see a pretty serious shake-up of the landscape as major players are forced to merge or close. If history is any indication, we shouldn’t be surprised if Wal-Mart or Target acquire other big brands in the coming years to keep up.

For industries beyond grocery, the Whole Foods acquisition highlights Amazon’s ambition to redefine consumer expectations. Brands hoping to compete in the age of Amazon need to think outside the box — and they need the agility to adapt to a quickly changing retail game. This requires a forward-thinking strategy and the technical infrastructure that supports a cohesive omnichannel experience for customers, whether they’re shopping on a computer, phone or in-store. Failure to do this means brands and retailers will lose customers — probably to Amazon.

Victoria Gustafson is CPG and grocery strategy vertical lead at Astound Commerce, the world's largest independent digital commerce agency.