Five years after Amazon’s monumental $13.7 billion acquisition of Whole Foods Market, it’s pertinent to examine the changes and impacts of this ownership. This acquisition marked Amazon’s most significant foray into physical retail, specifically the grocery sector. Since the purchase in 2017, Amazon has implemented numerous changes within Whole Foods, ranging from price adjustments to the integration of advanced checkout technologies across its extensive network of over 500 stores in the United States.
While Amazon has expanded Whole Foods’ footprint by opening 60 new locations, including a specialized “dark store” dedicated to online order fulfillment, Whole Foods’ market share remains relatively modest. Research from Numerator indicates that Whole Foods captures just over 1% of the grocery market, significantly trailing industry giants like Walmart at 19% and Kroger at 9%.
A notable leadership transition occurred recently as Whole Foods welcomed a new CEO. Jason Buechel, formerly the operating chief, assumed the leadership role on September 1st, succeeding co-founder John Mackey, who had been at the helm since 1980. Mackey, known for his strong personality and sometimes controversial viewpoints, led Whole Foods from its inception.
Industry analysts like Jason Goldberg from Publicis highlight the potential culture clash between Mackey’s original vision and Amazon’s corporate approach. Mackey’s long tenure post-acquisition was seen by some as surprisingly enduring given these potential differences.
Buechel’s leadership begins at a crucial juncture for Amazon as the company intensifies its focus on physical retail, particularly within the grocery domain. In a recent financial report, Amazon’s physical store revenue demonstrated a 12% increase in the second quarter, contrasting with a decline in online sales. This shift marks a departure from previous trends where Amazon’s physical stores underperformed compared to its broader retail operations. Interestingly, while expanding in groceries, Amazon has also streamlined other physical retail ventures, recently closing 68 stores across its Amazon Books, 4-star, and Pop Up shop formats.
To understand the evolving identity of Whole Foods under Amazon’s ownership, it’s essential to examine key operational and philosophical shifts that have occurred since 2017.
Operational Adjustments and Supplier Relationships
Operationally, Amazon has initiated centralization efforts, relocating certain functions from individual Whole Foods stores to the company’s headquarters in Austin, Texas. Despite initial speculations about Whole Foods transforming into a conventional supermarket chain, the reality has been more nuanced. Whole Foods asserts that rather than replacing regional suppliers with large-scale national brands, they have expanded their partnerships with local brands, adding 3,000 new local brands in the past five years, marking a 30% increase since before the Amazon acquisition.
Whole Foods employs regional “forager” teams dedicated to discovering new local products. This model allows smaller, regional brands to gain shelf space in select stores without needing to meet the demands of company-wide supply chains. Amazon leverages its sophisticated data analytics to optimize product placement and assortment across different store locations.
Guru Hariharan, formerly with Amazon and now CEO of CommerceIQ, points out the enhanced personalization in product offerings. He notes the distinct shopping experience between Whole Foods locations even within the same region, attributing this to Amazon’s personalization algorithms that tailor product selections to local preferences.
Further supporting local and emerging producers, Whole Foods has launched an accelerator program. This initiative aims to fast-track promising local businesses onto Whole Foods shelves. Additionally, investments in employee training are evident through certified programs that have trained hundreds of Whole Foods staff as accredited cheesemongers and butchers, enhancing in-store expertise. While some in-store services like hot food bars and sampling stations were temporarily scaled back during the Covid-19 pandemic, Whole Foods confirms their reinstatement, indicating a return to pre-pandemic service levels.
Maintaining its commitment to product quality, Whole Foods emphasizes its focus on “local and clean” products. Since the Amazon acquisition, Whole Foods has more than doubled its list of banned food ingredients, now exceeding 250 items. This stringent list prohibits ingredients such as hydrogenated fats, high fructose corn syrup, and artificial sweeteners. Furthermore, Whole Foods maintains strict standards for meat sourcing, requiring it to be antibiotic-free and without added hormones.
Expanding its quality commitments, Whole Foods has also strengthened standards for canned tuna, eggs, and chicken welfare. In a move towards environmental responsibility, Whole Foods eliminated plastic straws in 2019 and reduced plastic usage through initiatives like introducing new produce bags and rotisserie chicken containers.
Despite these advancements, the integration process has not been without challenges for the Whole Foods workforce.
A year post-acquisition, a group of Whole Foods employees circulated an email among thousands of colleagues expressing concerns about the changes under Amazon’s ownership. These grievances included the elimination of certain stock options and increased workloads with perceived resource and compensation constraints. Efforts to unionize under the Retail, Wholesale and Department Store Union have faced obstacles and have not progressed.
Autonomous Shopping Technologies and Customer Experience
For shoppers, the most noticeable changes within Whole Foods stores are the technology integrations designed to streamline and modernize the shopping experience.
Amazon has introduced its Amazon One palm recognition payment system to over 20 Whole Foods locations, with plans to expand to 65 more stores in California. This system allows customers to link their palm print to their Amazon account, enabling payments without cards or phones. A device scans the customer’s palm to process transactions.
However, the adoption of biometric payment technology has raised privacy concerns.
Privacy advocates, including Jason Goldberg, point out the valid concerns surrounding the use of biometrics for payments, particularly regarding data usage and security.
Amazon is also marketing its palm-scanning technology to other businesses, including retailers and event venues. However, a deal with Denver’s Red Rocks Amphitheatre was rescinded after activist groups and musicians, including Rage Against the Machine, raised concerns about potential data sharing with government agencies.
At select Whole Foods locations, Amazon has implemented its “Just Walk Out” technology, enabling checkout-free shopping. Currently available in two Whole Foods stores, one in Washington, D.C., and another in Los Angeles, this system utilizes cameras and sensors to track purchases automatically.
CNBC reporters tested the Just Walk Out system at the Washington, D.C. store. The store is equipped with hundreds of cameras and hidden scales that monitor product selection. While exiting through the Just Walk Out turnstiles using palm scan payment was seamless, the emailed receipt was initially inaccurate, missing several items, likely due to briefly stepping outside the monitored shopping area.
Jason Goldberg notes that initial versions of such technologies often have imperfections and can deter customers if issues are significant.
Amazon maintains that Just Walk Out is “highly accurate” and provides a 30-day window for customers to request refunds for discrepancies on digital receipts. Regarding privacy, Amazon states that sensitive information is handled according to its established policies, which include sharing only aggregated, anonymized data with consumer goods companies, not individual customer data.
Privacy considerations have become increasingly relevant as Amazon expands its data collection ecosystem, encompassing online shopping data, Alexa devices, Ring doorbells, and, soon, room-mapping robot vacuums following the acquisition of Roomba maker iRobot.
Ethan Chernofsky from Placer.ai highlights Amazon’s unique advantage in the grocery sector due to its technological prowess. He suggests that Amazon’s digital technology capabilities provide resilience during challenging economic periods and enable them to identify efficiencies and profit optimization opportunities that may elude traditional grocers.
AiFi, a competitor in the autonomous retail technology space, has deployed its computer vision systems in 84 stores, including Aldi in Europe and various smaller format stores. AiFi’s CTO, Joao Diogo Falcao, suggests that autonomous checkout technology can increase customer spending by removing the friction of traditional checkout and payment processes.
Amazon is also experimenting with the Dash Cart, a smart shopping cart that tracks items as they are added, eliminating the need for traditional checkout lanes. Currently limited in capacity and functionality, the Dash Cart is slated to be introduced at a Whole Foods Market in Westford, Massachusetts.
Price Strategies and Private Label Expansion
Pre-acquisition, Whole Foods faced a perception of high prices, often nicknamed “whole paycheck.” Amazon aimed to address this image and make organic and high-quality foods more accessible.
An Amazon spokesperson stated their goal was to “make high quality, organic foods more affordable and accessible for everyone,” and pointed to price reductions across Whole Foods aisles, Prime member discounts, and in-store Prime member deals.
Amazon’s strategy also involves improving profit margins, a common challenge in the grocery industry known for tight margins on many staple items.
Jason Goldberg explains the margin pressures in grocery retail, where efficiency is crucial for profitability due to perishable goods and low-margin items like bananas.
Private label brands, or in-house products, are a key strategy for boosting margins. Whole Foods’ 365 private label brand underwent a refresh in 2020. In the past year, Whole Foods added 295 new products to the 365 line, bringing the total to 2,200 products.
Guru Hariharan suggests that Amazon is strategically replacing branded products with its private label offerings within Whole Foods to lower prices.
Coresight Research indicates that Amazon has at least 111 private label brands across its various retail categories, including Amazon Basics and Solimo for household goods and Amazon Essentials for apparel. Amazon has faced antitrust scrutiny regarding the potential unfair advantage it may give to its private label brands by leveraging its extensive customer data.
Evolving Online Order Fulfillment and Dark Stores
Online grocery ordering has become a critical area of focus for Amazon and Whole Foods. Whole Foods reported a threefold increase in online order volume in 2020 compared to 2019, driven by the pandemic-related shift to online shopping.
Jason Goldberg notes the widespread interest in digital grocery among retailers, but also highlights the challenge of achieving profitability in this channel.
For Whole Foods, expanding its store network enhances online order profitability by reducing delivery distances and improving logistics. Whole Foods’ global network of 533 stores now reaches over 170 million customers in the U.S., Canada, and the U.K.
To optimize online order fulfillment, Whole Foods has established a “dark store” in Brooklyn, New York. This store is not open to the public and is exclusively dedicated to fulfilling online delivery orders. Goldberg mentions that other major grocers like Walmart, Albertsons, and Kroger are also experimenting with dark stores and automated fulfillment solutions to reduce labor costs and improve efficiency.
The rise of professional shoppers fulfilling online orders has led to consumer frustrations, prompting retailers to explore alternative fulfillment models like dark stores and fulfillment centers.
The exclusive partnership between Instacart and Whole Foods for online order fulfillment ended after the Amazon acquisition. Amazon has since transitioned many of the gig workers who previously fulfilled these roles to become official Whole Foods employees. Additionally, some employees manage in-store areas dedicated to Amazon online order pickups and package returns, further integrating Amazon’s broader e-commerce ecosystem with the Whole Foods physical store presence.
Assessing Whole Foods’ Performance Under Amazon
Evaluating the overall success of the Whole Foods acquisition is complex, as Amazon consolidates Whole Foods’ sales within its physical stores category, which also includes Amazon Fresh, Amazon Style, and Amazon Go stores. However, Whole Foods is undoubtedly the largest component within this category.
Earlier in the year, there were signs of challenges, with Amazon announcing the closure of six Whole Foods stores shortly after reporting lower-than-expected first-quarter earnings.
However, as in-person shopping rebounds, Whole Foods is showing signs of recovery. Placer.ai data indicates that customer visits to Whole Foods have returned to levels comparable to July 2017, prior to the Amazon acquisition.
Ethan Chernofsky notes that Whole Foods was significantly impacted by the pandemic and its recovery has been less robust compared to some other grocery chains. He interprets the store closures as a strategic “right-sizing” and optimization effort rather than a sign of broader decline.
Despite the closures, Amazon has continued to expand its grocery footprint by opening seven new Amazon Fresh stores, a more mainstream grocery format with 41 locations in the U.S. and 19 in the U.K. Whole Foods also plans to add 50 new stores in rapidly growing areas.
Chernofsky suggests that Amazon’s multi-pronged grocery strategy, encompassing Amazon Go for quick urban shopping, Amazon Fresh for value-oriented suburban and urban convenience, and Whole Foods as a higher-end offering, creates a potentially powerful combination to dominate the grocery market. He anticipates Whole Foods will maintain its position as a premium grocer within this diversified portfolio.
