With the news last week that U.S. regulators plan to take more time to review Amazon’s $13.7 billion acquisition of Whole Foods, industry analysts can now take more time to speculate on the strategic implications of one of the biggest retail mergers in years. What is Amazon really up to?
Some have interpreted Amazon’s move as a signal that the online giant is finally giving in and investing big into brick-and-mortar retail. Digging deeper, though, it’s clear that Amazon’s real interest is in two things: first, the treasure trove of consumer data that comes with this acquisition; and second, Whole Foods’ private brand product.
Let’s start with the data. What exactly is in the Whole Foods data that Amazon would want? Answer: Grocery buying habits and patterns. Preferences. Correlations between purchases of different products and even different categories.
Jeremy Stanley, vice president of data science for Instacart, one of Amazon’s competitors in the grocery space, recently told CNBC: "One of the wonderful things about groceries is that compared to other e-commerce purchases, groceries are habitual and frequent. People need groceries every week.”
With massive amounts of data from Whole Foods shoppers, Amazon will ultimately be able to tailor the grocery shopping experience to the individual. Amazon has already mastered the process of upselling, i.e. offering additional items that go with the items the consumer is looking to buy. With consumables like groceries, Amazon will know when you run out of cereal and will present you with the offer to buy more at precisely the right time. Alternatively, the new box of cereal may just show up at your door at the moment you take that last bite.
If it’s about the data, why would Amazon acquire Whole Foods instead of another large grocery chain such as Aldi or Kroger?
First, the data from Whole Foods customers is literally “rich”. This data is from affluent shoppers who represent high margin upsell opportunities for Amazon. Business Insider states that the typical Whole Foods customer has over $1000 per month in disposable income.
Second, and more interestingly, is that Whole Foods has a strong private label business with its 365 brand. Why is this important to Amazon? In case you haven’t noticed, Amazon is becoming more and more vertically integrated. It now runs eight private brand lines of fashion apparel, including Lark & Ro, Ella Moon and Mae, and this business has been growing rapidly. The online giant also offers private brand products for everything from batteries to baby wipes and diapers. Amazon is even developing its own content. Its “Manchester by the Sea” film was produced completely by Amazon and was a blockbuster hit last year.
The typical argument for vertical integration is that private brand product is higher margin than third-party branded product. That is true and is an important part of Amazon’s strategy. But even more important is the fact that private brand product represents differentiation. In a retail market where there is a “sea of sameness” and national brands can be found through nearly every channel, private and exclusive brands create a reason for the consumer to buy through Amazon as opposed to going elsewhere. If Amazon has the best shopping experience, the fastest delivery, the best prices, and now unique products, why would you shop anywhere else?
Amazon has a better understanding of the customer than any other retailer. The Motley Fool estimates that over 80 million people are Amazon Prime members. With this data, it is capable of building analytic models which can predict what these consumers will want, how much they will want, and when they will want it.
That’s great if you are Amazon. But if you are not Amazon, what do you do?
To compete with Amazon, retailers need to develop their own differentiated product. Department stores are realizing this. Kohl’s private brand products now account for nearly 50% of total sales. In a Fortune article, Michelle Gass, Kohl's Chief Merchandising and Customer Officer, said: “The health of our private brands is critical to our success." Bon-Ton Stores has stated that it wants to grow its private brand business from 19% of total sales to 25%. Dick’s Sporting Goods also recently stated that is will be reducing its exposure to national brands in favor of giving its private brands more floor space. These products cannot be found on Amazon, nor can they be found in any other department store. They give consumers a reason to shop at Kohl’s or Bon-Ton or Dick’s.
While Amazon's purchase of Whole Foods enables them to add a tremendous amount of data to their coffers, the true differentiator lies in the company's mastery of using data to better understand their customer’s needs, predict shopping behavior and generate longevity with its loyal customer base.
As Amazon's reach extends into other sectors, it's anyone's guess what they will do next. It is critical that retailers and brands learn to not only gather the right kind of data that helps them to understand their customer, but harness its power to ensure their products and pricing are in line with expectations and keep customers coming back.
