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MarketLine Analyst Insight

Amazon and Whole


Foods
A new era for organic foods
Jade Kneen
Reference Code: MLAI0002-133

Publication Date: August 2017

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Amazon and Whole Foods: A new era for organic foods MLAI0002-133 08/2017

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OVERVIEW
Catalyst
One of the biggest barriers for consumers choosing organic foods currently is price. So when Amazon slashed Whole
Foods prices by up to 43% on its first day as owner of Americas healthiest grocery store, many considered this a new
era not only for the digital giant but also for organic foods.

Summary
Amazon made its biggest acquisition to date in August by buying Whole Foods. The purchase cost Amazon a little under
$14bn and has the promise of shaking up the organic foods industry. The digital giant has made previous attempts at
trying to crack into the fresh food industry with Amazon Fresh, but is now moving into a physical location.

While known for being an organic food grocery store, Whole Foods has gained the reputation for being expensive and
costing a whole paycheck. The main issue was that while Whole Foods was a trail blazer in the organic foods market,
many other supermarkets have now followed suit. These stores not only offer alternatives which add to the consumer
convenience but also offer cheaper options.

Whole Foods has clearly been in trouble with dropping profits. However, Amazon is able to offer economies of scale
which will result in cheaper prices; the branding to bring in more customers and also the logistical expertise to bring in the
possibility of online delivery.

However, the marriage does face many hurdles. There are worries about how Amazon will change the face of Whole
Foods, having already begun bringing electronics into the store by selling the Amazon Echo and Echo Dot at discounted
prices. The company has also made massive discounts of up to 43% on the first day, which successfully declared that
Amazon had arrived. There will also be further discounts promised to Amazon Prime customers, along with the
introduction of Amazon Lockers in stores to allow consumers to collect and return purchases made online.

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TABLE OF CONTENTS
Overview ............................................................................................................................................................................. 2

Catalyst............................................................................................................................................................................ 2

Summary ......................................................................................................................................................................... 2

Amazon and whole foods: A new era for organic foods ...................................................................................................... 6

Amazon Inc. buying Whole Foods shocked the world but organic foods are leading the way in the United States ......... 6

Amazon has solidified itself as one of the leading digital retailers so the next step is brick and mortar ....................... 6

Whole Foods online retailing was in dire need of help which the digital giant can provide .......................................... 6

Organic foods market is growing but price and convenience are still holding it back ...................................................... 7

Amazon is capable of reducing costs and increasing convenience for Whole Foods ...................................................... 8

Analyst's Final Thoughts ..................................................................................................................................................... 9

Appendix ........................................................................................................................................................................... 10

Further Reading ............................................................................................................................................................. 10

Ask the analyst .............................................................................................................................................................. 11

About MarketLine .......................................................................................................................................................... 11

Disclaimer ...................................................................................................................................................................... 11

MarketLine

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LIST OF TABLES
No table of figures entries found.

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LIST OF FIGURES
Figure 1: Amazon and Whole Foods Market logos ............................................................................................................. 7

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AMAZON AND WHOLE FOODS: A NEW ERA FOR
ORGANIC FOODS
After successfully jumping the hurdle of gaining shareholder approval, and the Federal Trade Commission dropping its
investigation into the merger Amazon has been able to successfully buy organic foods retailer, Whole Foods. This
backwards integration is setting a clear precedent for Amazons ambitions of expanding into the food market. The digital
giant slashed prices in stores and has already made suggestions that these will not only stay, but that Amazon Lockers
will be built in stores. Consumers will also begin to see Amazons Echo and Echo Dot on sale in store.

Amazon Inc. buying Whole Foods shocked the world but


organic foods are leading the way in the United States
In June Amazon announced its largest acquisition to date. The digital retailer was buying Whole Foods for just under
$14bn. Not only was this the giants largest acquisition, but it would also be its first step into brick and mortar retail.

Amazon has made many important developments within the digital world and now has developed its logistical expertise
to be able to develop further from a physical store. Whole Foods is also in dire need of assistance, with falling revenues
and shareholders demanding that improvements be made. Amazon could not only afford to acquire the store and had
interests to do so, but also had the skills and means to develop the store as it needs.

Amazon has solidified itself as one of the leading digital retailers so the next step is
brick and mortar
Amazon already has a firm grasp on the digital retail industry, offering a wide range of physical merchandise along with
digital shows and music. The company operates several international websites, with North America making up 58.7% of
the companys revenue in 2016.

In recent years, Amazon has become more interested in expanding its own brand. This began through the manufacture
and selling of Kindles, Amazon Instant Video replicating Netflix, and more recently the Dash button which allowed
consumers to order essentials which a press of a button and then Amazon Echo with Alexa Voice service. The company
has firmly placed itself at the center of its consumers needs by providing the best and quickest service.

However while the company has been expanding rapidly, it had yet to move into a physical location. This is important
because though Amazon can provide cheap and convenience, intelligence suggests that consumers still prefer going into
store and interacting with products.

Whole Foods online retailing was in dire need of help which the digital giant can
provide
Whole Foods has been suffering falling sales and increasing pressure from investors to improve performance. The main
issue is that while originally Whole Foods was the main place consumers could find organic goods; this was quickly
adopted by other stores. These stores such as Wal-Mart had a wide range of products for consumer convenience, while
Whole Foods became a one-trick pony. With Whole Foods relying heavily on organic foods, a market which is not only
expanding but the initial fascination is also slowly dying away, the debts increased while interest dwindled.

Another issue for the store is that online retail represents less than 1% of the companys revenue. This provides Amazon
with plenty of potential expansion within Whole Foods. The main issue with online retail for Whole Foods is the essential
need for perishable foods to be delivered quickly, and while Amazon has developed logistics to same and next day
delivery, especially for Prime customers who pay extra for the convenience, the company would need to further develop
this to meet the demands of these foods.

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Figure 1: Amazon and Whole Foods Market logos

SOURCE: Amazon.com; Whole Foods Market


MARKETLINE

Organic foods market is growing but price and convenience


are still holding it back
The organic foods market in the United States is strong and growing. MarketLine reports that the market grew by 14.3%
in 2016, reaching a value of $44,908.1 million and this is forecast to grow by a further 41% over the next five years. The
United States also accounts for 45.6% of the global organic food market value. This increase in the market is due to the
increasing education and expanding middle class who have more disposable income and desire for organic foods. The
main benefit of organic foods is that these are considered healthier with less potential deadly side effects due to the use
of pesticides. However the main downfall is cost.

Organic food is more expensive than non-organic alternatives. Shopping at Whole Foods is commonly referred to among
consumers as spending your whole paycheck. This cost is because the farms are typically smaller, and the crops take
longer to grow. Another cost is the compulsory segregation of organic and non-organic foods which adds to the labor.
This not only results in limited supply in comparison to the demand but also in increased costs for the customer.

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Amazon is capable of reducing costs and increasing
convenience for Whole Foods
On Amazons first day as owner of Whole Foods, the digital giant was reported to have cut prices by up to 43%. Rather
than being a gimmick to attract attention to the merger, Amazon has stated that these discounts will remain- with Amazon
Prime consumers benefiting from further reductions. By doing this, Amazon has made a strong declaration. Whole Foods
will become a serious competitor for its cheaper alternative stores such as Wal-Mart Stores Inc., Kroger Co. and Costco
Wholesale Corp. This will drive a greater range of consumers into the stores, especially those who previously chose to
shop elsewhere for cheaper alternatives.

However, while consumers and headlines are focused on these massive discounts it is important to note that these are
only on select top line products. Overall, the costs in store have barely seen a 1% discount on average. While it is still
early days, and Amazon has promised further discounted lines in the future, it is possible to argue that this is a marketing
ploy to get customers through the door.

Another interesting move on this first day of marriage was that Whole Foods began selling the Echo and Echo Dot in
store. This suggests that Amazon is not planning on keeping Whole Foods an organic food haven, but rather expanding
on what is available in the store. By offering consumers more products outside of organic foods the store can move away
from the risky area of being a one-trick pony. Further to this, Amazon has also suggested that Amazon Lockers, where
customers can pick up or return products purchased on Amazon.com, will appear in select stores. This will drive more
consumers into the store.

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ANALYST'S FINAL THOUGHTS
Though still in the very early stages, it is undeniable that the merger between Amazon and Whole Foods will be a pivotal
point for both companies. There is the strong possibility that it will be highly successful, if managed correctly. Amazon is
already taking clear steps to address Whole Foods shortcomings, such as cutting prices and beginning to expand the
products which are on offer. However, it is still unclear if these are simple attention grabbing gimmicks or a long term
feature.

An interesting factor will be to see how Amazon further uses its skills within a physical store. Consumers will be
interested in potential home deliveries to add to the convenience which the store is in need of. With the potential future
use of drones this could open up the opportunities of same day deliveries or potentially within a few hours if not quicker.
However that would be a logistical hurdle which will be unlikely to happen within the immediate future.

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APPENDIX
Further Reading
United States Organic Foods Industry Profile

Amazon.com, Inc. Company Profile

Whole Foods Market Inc Company Profile

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Ask the analyst
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