Is Amazon’s purchase of Whole Foods half-baked?


Jun 28, 2017

At first glance, Amazon’s recent announcement of its planned $13.7 billion purchase of Whole Foods seems like another potential win for the e-commerce leader.  Instant access to an affluent and dedicated customer base gives Amazon a formidable entry point into the bricks-and-mortar grocery business, as well as establishes them as a true omni-channel retailer, which ultimately extends Amazon’s reach into the hearts (and wallets) of consumers.  Instead of running scared, however, existing grocery retailers should welcome this move as it opens Amazon to further competition.

Let’s look at this planned purchase through the lens of Disruptive Innovation.

Amazon rose to power and gained its position as a leader through disrupting traditional retail. They combined low-end and new-market disruption to aggressively take market share from seemingly strong, yet complacent bricks-and-mortar retailers.  They energetically expanded and bought competitors in this space, most notably Zappos, and then folded them into their existing operation – basically taking their resources and plugging them into the existing Amazon processes and profit models.  Big box, grocery, and discount retailers were late to the game and although they have tried to adapt and compete, Amazon now rules the online space.

If Amazon’s bid for Whole Foods is successful, it could approach its new appendage one of two ways. It could maintain business-as-usual and essentially treat Whole Foods as a distinct entity, OR it could use Whole Foods as a brick-and-mortar extension of itself, essentially meshing the two business models.  If it chooses the latter, this is likely where things will begin to fall apart.

The Theory of Disruptive Innovation shows us that when a new entrant attempts head-to-head competition against entrenched incumbents (in this case, established bricks-and-mortar grocery chains like Walmart and Kroger) the incumbents almost always prevail.  Integrating a complex model like physical store-based retail into the Amazon model will be fraught with danger, especially with a retailer with an ingrained, diverse culture like Whole Foods.

Against a pure e-commerce option, grocery leaders like Walmart and Kroger had little idea on how to compete against Amazon’s model.  In bricks-and-mortar, existing players already know how to compete. Amazon doesn’t have deep knowledge of store-based retail and will likely struggle to win against seasoned, disciplined performers. While Amazon may have driven leadership, smart people, cutting-edge technology, and powerful analytics, they still will face the same global retail issues and friction points of site operations, inventory management, human resources and customer relations.  They will struggle against experienced, well-established and well-funded leaders.

Existing retailers didn’t have a clue on how to compete with Amazon as an e-commerce player, but they do have a good idea on how to win against store-based competitors.  Amazon has opened itself to competition in a market where they don’t have strength, deep knowledge or a track record of success, and they have provided an opening for competitors to regain customer loyalty. By pushing into entrenched models where they do not have the disruptive advantage, they face a steep learning curve, fierce competition and imploding margins; all of which may benefit consumers, but will allow existing players to eat Amazon’s lunch.

Jon is a visiting fellow from Li & Fung, a Hong Kong-based trading and supply chain management company. Jon’s primary research focuses on the global supply chain of the future in order to identify how organizations should develop to serve the existing and emerging needs of stakeholders.