By Michael Musso
On June 16 Amazon announced its intention to buy Whole Foods with a cash bid of $13.7 billion, a deal that is expected to close during the second half of 2017. This 16-multiple figure is the highest price Amazon will ever have paid for a company and a good indicator of its desire to shake up retailing in a big way.
The retail world is already spinning, and every industry has somehow been touched as traditional distribution channels have been rearranged. But this move by Amazon could be a game changer for the consumer packaged goods (CPG) industry and have big impacts on the products we buy and use every day.
Here are six factors to consider.
Amazon is an industry disrupter. The company is hoping to be the largest retailer — in all consumer segments — in the world. With this latest move, it’s not just trying to change how consumers buy groceries. As an example, look at the company’s original disruption: bookselling. Amazon not only shifted how and where books were sold, but it also changed how they were made — eventually forcing publishers, authors and everyone else along the supply chain to cut costs. The same thing could happen in food. If this deal closes, prices at Whole Foods will likely come down. High cost has been Whole Foods’ biggest obstacle to the fresh concept. With Amazon in the picture, more consumer-friendly pricing is probably on the horizon.
Customers get what they want at a price they want. Amazon’s leader Jeff Bezos has strategized from the beginning how to give customers what they want, when they want it and at the price they want to pay for it. Getting into the grocery business takes Amazon from a contender to a winner when it comes to leveraging with CPG brands. Amazon will leverage the largest brands in the world (if not Tide, for example, it will be All, or even something from Amazon’s own Private Label product lines). At the end of the day, it’s about getting consumers what they want. And Amazon plans to get much closer to them.
Amazon makes a “fresh” play. Access to fresh food is a component of this deal, but it’s not the only factor. This is much bigger than trying to get a “bite” out of Millennials’ shopping habits. Amazon likely looks at grocery as the next step in consumer satisfaction, and it’s probably all about that. What better way to get into it than with Whole Foods, which enables Amazon to have 450 brick-and-mortar locations and multiple distribution centers to enhance its online delivery to the customers who want it?
This is a boon for CPG. After hearing about the bid, some experts expressed they would be terrified if they were leading a consumer-packaged-goods company — but this isn’t necessarily a risk. It’s a boon for CPG. Consumer shopping habits have already changed dramatically. Promoting CPG both online and in-store is a significant boost for major CPG packages. A manager of Tide, for example, would likely be thrilled that Amazon would put it front and center in stores and online. CPG has been through a long period of slow growth. This move can be the impetus to a new era of growth for big CPG brands, and even smaller ones that are willing to play the Amazon way.
Omnichannel is omnipotent. What news of the deal brings is the unabashed recognition that being an omnichannel company is critical. This is the beginning, not the end, of what Amazon will do. And there’s more disruption in other industries to come. If retailers are going to survive in the next two decades, they have to be committed to an omnichannel strategy. The deal also appears to be a confession by Amazon that, in some industries, four walls will still matter. This is where CPG can lead Amazon to success. CPG knows more about consumer behavior at retail than does any other industry.
CPG takes action. Companies doing business in the CPG industry must now figure out now how to give Amazon the best cost of goods. This will have significant downstream impact on raw material suppliers, farmers and packaging companies. Everyone in the supply chain better figure out a way to sharpen their pencils one more time. Amazon is brand agnostic; it wants to promote them all and let consumers decide the winners and losers. What’s relevant and important, though, is to give consumers the best prices possible — when and how consumers want them. But Amazon buying Whole Foods blurs the line because it is a clear indicator that Amazon intends to be a powerful retailer for food. Even though the combination of Amazon and Whole Foods will account for only 1.4 percent of the grocery industry, the future is easy to predict. Before, Amazon was additive. Now, it is significant.
From an overall industry perspective, Amazon will take a long, hard look at other industries for potential acquisition. It’s all about leverage, but leverage for Amazon’s benefit. Amazon looks at itself as working on behalf of the consumer. If a company has the resources and patience to work with Amazon — the largest CPG organization in the world — it will benefit. Furthermore, if brands are willing to play ball the consumer-oriented way, they’ll win. The losers will be those that don’t know how to play with Amazon, or don’t have the resources.