When Amazon announced last week that it would purchase Whole Foods for $13.7 billion they shook the retail industry. Amazon has been the specter looming over the retail industry for years. Department stores and specialty chains have endured hard times and closed many store fronts. But until now, retail’s biggest moneymaker – the $800 billion grocery business – has remained mostly unaffected.
That changed this week with the announcement of the Amazon and Whole Foods merger. The idea that customers can order their groceries from the convenience of their computers and mobile devices and have them timely delivered to their home introduced a new realm of possibilities, putting them way ahead of the competition. While this new feature is exciting for consumers, it is terrifying the competition. Here is what could be in store for the new Whole Foods under Amazon.
Amazon’s purchase of Whole Foods sent the stock of other grocery chains plummeting. It is important to understand the Amazon basically doesn’t make money. They operate under a unique business model whereby the company’s overall net income is nearly zero quarter after quarter which is a huge problem for every grocery chain in America, which typically operate on very thin margins. No doubt, Whole Foods under Amazon will almost certainly receive lower profit margins than it did as an independent chain and that means trouble for everyone else in the grocery industry.
Whole Foods historically delivers healthy profit margins through dividends, which is how their competitors operate as well. Amazon on the other hand, is the world’s largest startup and startups don’t operate like that. Their goal is to make money for their shareholders by being a bigger company and therefore a more valuable company. Amazon’s cash flow is all pumped back into the company to make new products and services like their Echo.
Most people agree that Whole Foods is a nice place to shop even though it is considered pricey as well. But imagine if they decided to not really care about profits… They could easily address this problem by making everything cheaper. This price reduction would increase demand which would justify opening more store fronts. Ideally, this would accelerate Amazon’s grocery delivery ambitions. This idea that Amazon could crack the code on grocery home-delivery is a nightmare scenario for the supermarket industry.
However, if Amazon doesn’t succeed at bringing revolutionary innovation to the grocery market, they are introducing a player that doesn’t care about profit margins which is devastating to competitors. Other grocery chains will be forced to respond with even lower prices at lower margins. How can other companies compete and make money in an industry that contains a major player who doesn’t actually try to make money?