Breaking down Amazon’s purchase of Whole Foods

Amazon has been experimenting with delivering fresh groceries with Amazon Fresh since 2007 without much success.

Selling perishables online is very different from selling non-perishables. It is not a natural business extension because it requires a separate logistics chain with temperature-controlled warehouses and refrigerated trucks to keep food fresh. The most crucial aspect of the perishable business is matching sales with forecasts. The fresh grocery industry cannot be conquered simply using brute force.

Price generally reigns supreme when people buy online. This holds true even for luxury products. Unfortunately, it is a fallacy to apply this logic to fresh groceries.

Fresh groceries are generally non-price elastic, but customers will pay more to be assured of better quality groceries online because they are not able to choose and ascertain the quality of their produce themselves. Therefore, marketing fresh groceries online based on lower cost has mostly been an unsuccessful endeavor for companies involved. 

So how does the purchase of Whole Foods Help Amazon?

Whole Foods has a strong branding and they are known to carry high quality groceries at a premium price. Coupled with Amazon’s step-up fulfillment centres, which are legendary for their efficiency and low cost, they are still able to maintain efficiency when it comes to integrating cold chain for frozen perishables with long expiry dates.

However, the logistics becomes notoriously complicated when trying to integrate fresh groceries with shelf life of just a couple of days. This is also why online companies that deal with personal shoppers (like Instacart and Honest Bee in Singapore) are generally more successful than online companies that stock groceries themselves. They completely bypass the complications and overheads of stocking fresh groceries.

However, this Whole Foods-Amazon deal may also leave Instacart vulnerable. With the retail footprint of Whole Foods, Amazon may just be able to work around the logistical problem of delivering fresh groceries with short shelf lives. With a Whole Foods store acting as a de-facto fulfilment centre for fresh groceries, Amazon is able to stock a full range of fresh produce to make online grocery shopping enticing. This also partially solves the efficiency of fresh supply chain.

Amazon has also been experimenting with eliminating checkouts. This Whole Foods purchase is a step towards making a future where you can walk out with our groceries without even taking out our wallets a reality.

Logistics has always been the biggest puzzle for companies dealing with fresh groceries. Whoever can solve this will be king and Amazon has just taken a big step towards the throne.