This article is a transcription of an episode from Thrilling Tales Of Modern Capitalism, Slates about companies and how they got there.Amazon bought Whole Foods in 2017 and entered the grocery industry. Amazon spent over $13 billion to purchase this 40-year-old supermarket chain. It is known for its organic merchandise, and sometimes its high prices. The purchase of Whole Foods was a major event in the grocery industry. Jon Springer, executive editor at Winsight Grocery Business, said that the acquisition of Whole Foods set off multibillion-dollar investments into digital grocery capabilities. It was like saying, "Oh, my God, this has to be fixed!"AdvertisementThe COVID pandemic changed the industry's focus to food delivery, which further bolstered Amazons strengths. People in grocery, Wall Street and the general public are now curious about Amazons plans for a supermarket. This is despite the fact that Amazon has a history of destroying any market it enters. Springer states that Amazon has changed the way things are done today. The grocery industry is the last to be affected by this influence.AdvertisementAdvertisementWhole Foods revolutionized the industry. It all started with a single Austin-based health food store that opened in 1980. The company has since become a household name, changing the way people think about groceries. Gary Fine, a former employee of Whole Foods, said that Whole Foods was a mission driven company. The mission was to change people's lives, have good stuff and change the way they eat. You know what? They won. They won. Organic food is possible.AdvertisementWhole Foods was facing a problem because other supermarket chains were offering organic and natural food. This could be because Whole Foodsor as it was known, Whole Paycheckhad earned a bad reputation for its high prices. Whole Foods' organic products were copied by conventional grocery stores, but they were much more affordable. Whole Foods launched a private label line called 365 Everyday value in 1997. It was intended to provide more affordable products, but it wasn't enough. John Mackey, the CEO and cofounder of Whole Foods, realized in the mid-2000s that Whole Foods was no longer a standout from the rest. In a 2004 interview, he stated that his ideas were on the fringes of culture when they started. They have evolved from being fringe ideas to becoming cool and hip over the years. It is now mainstream.AdvertisementAdvertisementWhole Foods was expanding rapidly across the globe, mainly because it offered something new to each neighborhood where it opened a shop. The company's popularity began to fade once the mainstream started to notice what Whole Foods was doing and began to make it more affordable.Whole Foods stock fell almost 40% in 2006 due to increased competition. The stock fell 76 percent in 2008 during the financial crisis. John Mackey sold a portion of the company to private equity investors. Whole Foods continued to grow over the years but was under increasing pressure from dissatisfied investors. Jon Springer said that the problem was simple. The company was facing increased competition. To get Whole Foods products, consumers no longer need to visit Whole Foods.AdvertisementSafeway and Kroger were the traditional grocery chains that offered organic food at a lower price in locations close to consumers across the country. Whole Foods was once able to buy up competitors. These rivals were not like independent health food chains. They were larger and more resourceful, and they knew how compete. Whole Foods was in trouble. Springer said that they were at the edge of their wits when Amazon popped up and offered to pay them. Let's make a deal. It was quite a relief.AdvertisementAdvertisementSpringer said that the sale was a major blow to the grocery industry. Springer says that the sale was a huge blow to the grocery industry.Amazon has long been the leader in online grocery shopping.Amazon acquired Whole Foods partly to encourage customers to sign up to Amazon Prime memberships. This loyalty program offers discounts on groceries and allows them to be part of Amazon's powerful loyalty program. There is more to it than that. Many believe that Amazon saw Whole Foods' purchase and operation as a way to gain knowledge about grocery shopping and to then use that information to open a bigger, more popular grocery store. Amazon Fresh is now announcing the opening of new stores across the country. Springer predicts that Amazon will open hundreds of Fresh stores in the coming years, not just dozens, but hundreds.AdvertisementAmazon Fresh stores are smaller and more affordable than Whole Foods, and come with no Whole Foods baggage. Springer states that they are more local-focused. They are cheaper to build and operate, and don't have the same reputational issues or expectations as Whole Foods. In other words, you expect a unique experience at Whole Foods. If they fail to deliver that, it is a problem. Amazon Fresh has a reputation for price, which they can overcome. It is not more difficult or likely easier for Amazon to apply the power of its Prime program to a new store than to adapt it to an existing store.AdvertisementAdvertisementAmazon might not want a huge chain of Amazon Fresh stores across the country. Amazon's ultimate goal is to deliver same-day groceries to everyone, everywhere, and those Fresh stores could be Trojan horses. Amazon has long been the white whale of online grocery shopping. Groceries account for a large portion of people's spending and are the only niche Amazon has not yet been able dominate. Online shopping was just 2 to 3 percent of the $800 million grocery industry before the COVID pandemic. It has hovered around 10 to 11 percent since the start of the pandemic. People expect that online grocery shopping will continue to grow even as the pandemic subsides. It's a complicated business.AdvertisementSpringer says: Food has multiple temperatures. There are cool, frozen, fresh and delicate foods, such as grapes, bananas or other items that can be crushed but need to be handled by someone. Because it is efficient, the grocery store can be a resilient place. They are close to your home. They provide labor for you to select the items, and the specific ones you choose. When you order groceries online, you are now relying on someone or something else to pick the items for you. This is to ensure that the cold stuff stays cool and that the frozen stuff stays frozen in the time it takes to deliver it to you. It's a complicated process. Amazon discovered in their experiments that it was difficult to accomplish this from a central warehouse located within a 150-mile radius. We must be very close to the customer. This is the advantage grocery stores have.AdvertisementAdvertisementAdvertisementWhile the expansion of Amazon Fresh stores may be seen as a traditional grocery chain strategy, it also serves to establish food-specific warehouses in every neighborhood. These warehouses can then fulfill online orders that customers place through their Amazon accounts. Amazon is facing a familiar foe as it tries to grow its grocery business. Walmart used to follow Amazon online, hoping that it would catch up. Amazon now wants to catch Walmart, the No. Amazon is now the No. 1 grocery seller in America. Springer says that they have the same thing as everyone else. Walmarts had 2,800 stores in the U.S., and an expanding e-commerce platform. Amazons also got the ecommerce business and a few stores.AdvertisementWe are now talking about two corporations that fight for dominance in the fastest-growing segment of the grocery industry. Since a 25-year old vegetarian opened the first Whole Foods Market in Austin, we've come a long way. John Mackey was a more business-oriented person than a hippie, but he never forgot that. Through a series of impulsive acquisitions, he grew Whole Foods. He was a Wall Street and private equity broker. He has been open about his dislike of labor unions. Perhaps Amazon was his destiny.You can listen to the entire episode by clicking the player below. Or subscribe to Thrilling Tales of Modern Capitalism via Apple Podcasts, Overcast Spotify, Stitcher or wherever else you get your podcasts.
