On Monday, Amazon officially took control of Whole Foods, and there were two big changes: ‘farm-fresh’ Amazon Echoes and surprisingly deep price cuts. But these tweaks are just superficial. Amazon has a very different corporate philosophy than Whole Foods, and how the company is run, and its approach to money, is going to have big effects on all of us. How we eat, what we eat, and where we buy it from is about to undergo seismic changes.
On a practical level, the price cuts are just getting started; Amazon is going to make it cheaper to buy food from the oft-mocked “Whole Paycheck.” Historically, Amazon’s entire strategy has been to cut prices to the quick in order to earn your long-term loyalty; to undercut everybody and make it up in volume. For Whole Foods, this means no more absurdly inflated asparagus water — because Amazon doesn’t want that ill-will and doesn’t need that money.
By now, you’ve probably heard McDonald’s is a vast soda cartel where the enormous profits on Cokes and coffees easily offset what they lose on burgers and Szechuan Sauce. Similarly, Amazon stays profitable by serving as the internet’s storage locker. So as long as there’s an internet where people need to store vast amounts of data cheaply, anything else the company does can at best break even and everything will be fine. It also has ridiculous purchasing power, so it can buy all your organic avocados and free-range beef at a much larger, and cheaper, scale.
That means, long term, that prices for food in general are on the way down, at least in areas where there are a Whole Foods. The Amazon + Whole Foods will quickly erode the decidedly large price difference between Whole Foods and its competitors. Which means margins in an already tight industry are about to get tighter.
None of this even factors in Amazon’s vast technological advantage at every level. We’ve yet to see how Amazon ties Prime, its subscription service that touches almost every aspect of its business, to Whole Foods, but that’s almost certainly in the works. Nor have we seen yet how Amazon’s vast delivery infrastructure will be brought to bear. Then there’s the question of data.
Amazon’s interest in brick-and-mortar stores isn’t just a PR stunt. The company is so effective because it leverages a shocking amount of data to figure out what you want and what price you’re willing to buy it at. So far, Amazon has applied this to the internet. Once Amazon + Whole Foods starts learning your shopping habits, and the habits of millions of others, it can start aggressively cutting just the right prices to keep you loyal.
The merger also gives Amazon the power, to some degree, decide what we eat. Historically, Amazon’s been agnostic about what it sells. It has viewed itself as a platform, not a competitor. But recently, the company rolled out “store brand” food, that you can only buy if you’re a member of Prime. That could unfold in all sorts of ways, from brands giving Amazon a check to push their product in Whole Foods stores, to Amazon setting a price and brands either meeting those prices or being booted off of Whole Foods’ shelves.
The clear loser in this equation is other grocery chains. Unless Amazon completely crashes and burns, which certainly isn’t out of the realm of possibility, the competition is about to face a competitor who doesn’t care if it makes money, one which can artificially drive down the price of food for quite possibly years, and one which is just one part of a vast multinational business, raking in billions, that knows its customers far better than any grocery store ever could. Long term, one of three things will happen: Grocery stores will sell out to Amazon-sized conglomerates (ready to buy literal apples from Apple?), they’ll find a new niche to occupy, or they’ll go out of business. Long term, that’ll mean fewer grocery stores, and less competition for your dollar. Heads up: Those low prices might be temporary.
This won’t happen tomorrow. Whole Foods has just 470 stores — making it a tiny grocery chain compared to Safeway, Aldi, and even Costco. Much of the country can’t get to a Whole Foods in the first place, and it’s not clear whether Amazon intends to open more stores. But it’s a threat the big chains can’t ignore, and the clock is ticking for grocery stores to get competitive. There is a giant coming, and it’s got endless supplies of kale and avocados.