Did Rotten Tomatoes Spark a $14 Billion deal?

When Amazon announced its bid for Whole Foods, you could practically hear the screams coming from the C-suites at Kroger and Wal Mart. When a giant like Amazon bites into your market, the chances of survival diminish—and the grocery industry is already famous for thin margins.

Buying physical locations is an interesting strategy because most grocers are doing the exact opposite. They are all working like mad to bring online shopping and unified ecommerce to customers.

More people are buying groceries online. A January 2017 report from the Food Marketing Institute and Nielsenpredicts that online groceries will grow five-fold by 2025. The report indicates that 25% of American households buy some groceries online now, up from 19 % in 2014. More than 70% say they will engage in online food shopping within ten years. Of those, 60% expect to spend about a quarter of their food dollars online.

Of course, Amazon is already in the food business. They launched Amazon Fresh in 2016 in 20 cities across the United States as well as in Berlin, London and Tokyo. For $14.99 a month you can order groceries from Amazon Fresh. Amazon Pantry sells non-perishables like cereal, chips, rice and coffee for a flat delivery fee of $5.99 per box, and Amazon’s Prime Now offers items from local grocers in some cities. With a finger tap and a Dash Button people can order many household products including groceries, but not fresh foods. Customers can also sign up for periodic delivery of laundry detergent, toothpaste, diapers, paper towels and other items frequently purchased in grocery stores using Subscribe and Save. Aside from this, if you have an Amazon Echo device equipped with Alexa, you can build a shopping list then ask Alexa to buy the groceries on the list for Prime Delivery.

Why Buy Physical Stores?

With all these services already in place, why is Amazon looking to buy physical stores? In a word: spoilage. According to a recent story in Bloomberg, Amazon experienced challenges with the high cost of losses caused by food going bad, an issue it didn’t have to solve with videos or books. Bricks and mortar grocers discount softening tomatoes and pork cutlets near their expiration dates or sell them to re-manufacturers. Apparently, at Amazon Fresh, partially spoiled food items were returned by irate customers and/or discarded at an alarming rate.

According to the story, the main reason Amazon began delivering groceries through Prime Now was to devolve spoilage risk back down to local suppliers; buying locations eliminates the problem. Vertical integration with a company like Whole Foods that already knows the business is a great way to learn, and along with retail outlets Amazon gets local warehouses, landing pads for drones, and established supply chains.

 

 

 

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