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Amazon and Whole Foods: Is it Truly a Match Made in Heaven?

Introduction

In this paper, I would like to analyze Amazon’s online grocery service— which includes both

AmazonPantry and AmazonFresh— and compare it with the brick-and-mortar grocery store

business of Whole Foods. I will be looking at each business’s structure, as well as the problems

each face, and how their respective business models tackle those challenges.

Amazon’s online grocery service is made up of two parts, AmazonPantry and

AmazonFresh. AmazonPantry was first announced in April 2014, and it’s a service that offers

products considered pantry essentials or important to the maintenance of a home— such as

cereals, canned goods, and cleaning supplies. Products can be bought individually or in bulk for

a flat shipping fee of $5.99— or for free for Prime members who have an order total of over $35

— and delivered in 1-5 days. AmazonPantry’s counterpart, AmazonFresh, was first launched in

Seattle in 2007 before expanding into major cities across the U.S. and the world. This service

offers fresh produce and meats from WholeFoods (after the chain was acquired by Amazon) and

even a variety of food options from local restaurants. Since AmazonFresh is dealing with

produce and perishable items food is delivered as early as within two hours but with a higher

shipping cost, $9.99 for orders under a local minimum and free for Prime members whose orders

are over the minimum. This minimum can vary from $35 - $50 depending on the city the order is

placed.

Both of these services implement a multi-domestic strategy because of the grocery

market faces a strong “pressure to adapt products or services for local markets” (textbook, 251).

Demand for certain products varies greatly according to the preferences of a market. For
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example, while meat products are a staple in meals nearly everywhere, they will not sell well in a

primarily vegetarian country like India. As a result, it’s important for AmazonFresh and

AmazonPantry to adapt to the preferences of the local market. The multidomestic strategy is very

cost-intensive because of the investment needed to acquire “knowledge of local culture,

language, customer demographics… and distribution systems” (textbook, 251). Amazon has

implemented this strategy successfully in India before. According to an article published by

Forbes, when expanding into the Indian market, Amazon implemented “a ground-up strategy

tailored for the local market” that included setting up and R&D base to understand customer

preferences and setting up kiosks in retail locations that “offer an ‘assisted buying’ service for

consumers” not as familiar with technology and online shopping (“7 Ways Amazon is

Winning”). Thanks to the investment made by Amazon to understand local customer

preferences, AmazonFresh and AmazonPantry use this information to implement a

multidomestic strategy that successfully caters product selections to the prospective market.

Whole Foods is a grocery chain that specializes in the sale of organic produce and health

products. It was first founded in Austin, Texas after a merger between SaferWay and Clarksville

Natural Grocery in 1980 (“Whole Foods Market”). What made Whole Foods unique at that time

compared to other stores in the same market was that they were the first to take the smaller

organic grocery store and turn it into a supermarket. They began to expand in 1984 and were

soon on the West Coast by 1989; by 2004, Whole Foods had entered Canada and the United

Kingdom with the acquisition of seven Fresh and Wild stores (“Whole Foods Market”). Whole

Foods was later acquired by Amazon in 2017.

The strategy Whole Foods Company has implemented to penetrate into new markets over

the years has been to first establish a store and then to acquire local organic food stores and use
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them to channel further growth for the parent company. According to the Whole Foods website,

“while continuing to open new stores from the ground up, we fueled rapid growth by acquiring

other natural foods chains throughout the '90s.” This strategy to fuel growth has served them

well in the various regions of the U.S. market considering how food preferences vary depending

on location; by acquiring local stores across the U.S., Whole Food is able to gain the benefit of

expanding into a new market without the hassle of gathering data about local demand and

without the cost of establishing a brand reputation from ground-up. By incorporating well-known

local organic food stores into its business, WFC positions itself as a provider of wholesome food.

Once customers gain awareness of their value proposition, there’s already an established Whole

Foods store ready to meet their needs.

When it comes to expanding into international markets, Whole Foods seems to prefer a

transnational strategy that involves acquiring foreign subsidiaries before establishing a store. In a

transnational strategy, “international subsidiaries are expected to contribute actively to the

development of the company’s capabilities, as well as to develop and share knowledge with

company operations worldwide” (textbook, 252). For example, Whole Foods first entered the

United Kingdom’s market by buying seven stores of Fresh & Wild in 2004. Whole Foods didn’t

build their first store in the U.K. until 2007; the three years spent after Fresh & Wild’s

acquisition were spent understanding the local market and the unique demands of people in the

different regions through the foreign subsidiary.

Problems

A major challenge that AmazonFresh experiences relate to the business model that comes

with the online ordering and delivery of fresh food. According to Ralf W. Seifert— a German-

based Operations Management professor— the online grocery delivery service faces a variety of
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obstacles that hinder profit generation: “The margins are thin, the product is highly perishable

and the supply chain is expensive and complex” (“Amazon Fresh and the Disruption”). Along

with the immense cost that comes with shipping and transporting bulky items, making a profit is

near impossible. Furthermore, many consumers want to “feel” and see the quality of fresh items

such as fruits, meats, and vegetables before purchase since items vary greatly in their quality.

These factors together have made the online grocery market very complex and cost-intensive—

leaving little room for profit. One way Amazon has tackled this issue is by starting

AmazonPantry in 2014. Amazon had hoped AmazonPantry would help combat some of the

challenges posed by AmazonFresh such as inventory expense— since non-perishable items last

longer— and delivery expense since same-day to 2-day delivery is no longer a necessity to

ensure the product is delivered in prime condition. Furthermore, since these products are all

standardized, sales would not be hindered by the need to “feel” or see the product in person

before purchase. Unfortunately, “usage of the service has been lower than anticipated,” which

forced Amazon to find a new avenue to boost sales and lower costs instead.

In 2017, Amazon purchased Whole Foods Market to counteract some of their delivery

costs and to build trust with the customers. By acquiring Whole Foods, Amazon “put more

customers within range of the retailer’s two-hour delivery window and store pick-up service

option” (“Amazon’s Grocery Ambitions”). When a customer is familiar with a store, they are

likely to go to the store to pick up their groceries rather than opting for at-home delivery, which

would aid in reducing Amazon’s delivery and transportation costs. Furthermore, if the fresh

foods sold are from an established grocery chain known for its top-quality and organic products,

then consumers are less likely to distrust the retailer’s selection of goods.
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Furthermore, the acquisition of Whole Foods Market fits in quite seamlessly with

Amazon’s current strategy and its target audience. As was previously discussed, Amazon

performs extensive product research on consumer demographics, preferences, and trends when

expanding into a new market. Amazon’s research-oriented focus doesn’t apply to just

international markets, but to new product markets as well. Part of Whole Foods’ appeal is the

amount of data it has on its target market— the affluent. These shoppers “represent high margin

upsell opportunities for Amazon…. the typical Whole Foods customer has over $1000 per month

in disposable income” (“Amazon’s Acquisition of Whole Foods”). By targeting the upper-class

consumer group, AmazonFresh and AmazonPantry can afford to increase the margins on their

products without having to worry about losing substantial consumer engagement. Eventually,

with the immense amount of individual data provided by Whole Foods (combined with data on

individuals provided by Amazon Prime) Amazon will reach a point where it “will know when

you run out of cereal and will present you with the offer to buy more at precisely the right time…

[or] the new box of cereal may just show up at your door at the moment you take that last bite”

(“Amazon’s Acquisition of Whole Foods”). A future like that can only become possible with

customers willing to overlook the expenses of such automated purchases.

How successful has the acquisition of Whole Foods been for Amazon? Currently, some

changes have already become visible in most Whole Foods stores. Amazon’s Echo products are

available are sold in stores and some locations are becoming lockers for delivery. Furthermore,

AmazonFresh and AmazonPantry have seen some renewed interest in its services as Whole

Foods becomes a key partner in both the delivery and the procurement of their products (“A Year

After Amazon”). However, this gradual growth in sales has been accelerated due to increased

demand for groceries with the recent COVID-19 pandemic.

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AmazonFresh, AmazonPantry, and other grocery delivery services have all been faced

with unprecedented demand, disrupted supply chains, and shortage of employees due to the

recent COVD-19 pandemic. The surge in demand has forced many skeptical shoppers to try out

one of the many online grocery services available. According to a survey from RBC Capital,

“more than a third of those who have shopped for groceries online over the past month were

doing so for the first time” (“‘It’s Just Like Ticketmaster’”). But Amazon is having difficulties

coping with this rise in demand. Currently, it’s accepting orders by invitation only and putting

interested consumers on a waitlist. Despite the exposure the surge in demand has created, the

disrupted supply chain and the shortage of employees have created problems elsewhere.

According to a survey by market researcher, CivicScience, “Nearly one in three Americans…

said they had a problem with a recent online order” (“‘It’s Just Like Ticketmaster’”). Inventory

shortages and overworked employees have led to poor product fulfillment and customer

satisfaction. Despite this new exposure, it seems current conditions are driving potential

customers away, which can only do more harm than good for AmazonFresh in the long run.

Currently, Amazon is aggressively hiring new employees to aid in this unprecedented time, but

only time will tell how much the COVID-19 pandemic has improved AmazonFresh’s market

share.

As for Whole Foods, their greatest struggle has originated from its greatest asset: their

people-based culture. Each Whole Foods Store is unique in the way that management and

employees are all enthusiastic about building valuable customer relationships and that stores are

all highly adaptable to local tastes and preferences. According to an article by the Harvard

Business school, employees “built relationships with customers to cater to their needs and came

up with ideas, like a bike messenger service or a new bread recipe, that sometimes found their
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way to other stores” (Amazon vs. Whole Foods). This level of influence— from both customers

and employees— was only possible thanks to Whole Foods’ decentralized business model. As a

result, neither products nor their prices were standardized across stores and this led to Whole

Foods’ “Whole Paycheck” reputation. That a simple grocery trip to Whole Foods would cost

customers an entire paycheck’s worth of money. Since Whole Foods was unique in its value

proposition— a supermarket with organic and GMO-free offerings— and since its target

segment was the upper class their high prices didn’t pose a problem until around 2013. As other

grocery retailers such as Walmart began to offer high-quality organic products at lower prices,

Whole Foods began to see a consistent decline in sales and loss of market share (“A Year After

Amazon”). Due to Whole Foods’ decentralized system and consumer-first culture, they failed to

compete with Walmart’s efficient inventory systems that emphasized the standardization of

products regardless of consumer preferences. Unfortunately, Whole Foods was cornered into a

position where the only way they could compete with other retail giants in the organic industry

would be to leave behind the reputation that had carried them to success so far— their people-

focused culture. Maybe Amazon’s data-driven and high-tech culture were what Whole Foods

needed to move away from this dilemma. That could be what motivated Whole Foods’ CEO,

John Mackey, to reach out to Amazon CEO, Jeff Bezos, to initiate the 13.7 billion dollar deal

(“A Year After Amazon”).

As mentioned previously, Amazon’s purpose for buying Whole Foods was to increase its

sales for AmazonFresh and AmazonPantry. However, Whole Foods’ “Whole Paycheck” problem

is an obstacle that Amazon must overcome to achieve better profit margins and to maintain a

customer base. To do that, Amazon has begun to implement a new “inventory system..., started

to centralize decisions about product selection, and slashed prices” (Amazon vs. Whole Foods”).
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However, the endeavor to make Whole Foods’ inventory system more efficient backfired

immensely in 2018, where entire shelves of food would be empty. In order to reduce spoilage

and excess inventory, Whole Foods implemented an Order-to-Shelf inventory system where

“employees largely bypass stock rooms and carry products directly from delivery trucks to store

shelves” (“Whole Foods employees reveal”). This strategy— implemented by Whole Foods

Market and not Amazon— failed to cope with the surge in demand that came after the

announcement of the merger. Evidently, Whole Foods’ inventory system will need quite a bit of

time and resources before its able to compete with efficiency giants like Aldi and Walmart. By

centralizing product decisions and standardizing offerings, Amazon has cut costs, but not enough

to compete aggressively against other grocery retailers yet. However, due to the COVID-19

pandemic, more consumers are trying out AmazonFresh— and by extension Whole Foods as

well— which has accelerated sales for the grocery chain. However, with the number of issues

faced by both customers and managers, only time will tell how much AmazonFresh and its

partner Whole Foods has benefitted for the surge in demand.

Implications

The case of AmazonFresh/AmazonPantry and Whole Foods is unique in the way that

they both meet each other “in the middle.” AmazonFresh lacked credibility with customers and

the perishable goods were expensive to store and maintain. On the other hand, Whole Foods

suffered from a lack of inventory efficiency and product standardization that hiked up their

prices. After the merge, Whole Foods provided AmazonFresh with the credibility of its organic

foods brand and aided in the reduction of storage costs with its existing infrastructure. Amazon,

in return, provided Whole Foods’ with the technology and experience needed to implement a

cost-reductive and efficient inventory system. Unfortunately, even though Amazon’s acquisition
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of Whole Foods on paper seemed like a match made in heaven, the fusion of their respective

value propositions became “the corporate equivalent of mixing tap water with organic extra

virgin olive oil” (“Amazon vs. Whole Foods”).

Amazon and Whole Foods became the answers to each others’ respective problems, but

until they can find a middle ground for management they will continue to face problems with

branding, cost-efficiency, and profitability. Employees play a key role in securing Whole Food’s

people-oriented brand, but they became the collateral after the adoption of Amazon’s scrupulous

data-driven management style. Due to Amazon’s “‘draconian’ standards” employees became

“frustrated about having to do paperwork instead of helping customers, and stressed over new

performance metrics with demerits if they failed to meet them” (“Amazon vs. Whole Foods”).

These new standards were a stark contrast to the ones that originally empowered them to “make

decisions about products that emphasize high quality, healthy, and local foods” before the

acquisition (“Amazon vs. Whole Foods”). Employees played a key role in ensuring customer

satisfaction and are the reason why Whole Foods catered to their customers’ needs so well. They

are the ones who interact with customers the most and are key for responding to consumer needs

and preferences— especially in a face-to-face setting.

Unfortunately, Amazon’s data-driven management style is far too focused on

standardization and efficiency to understand the important role employees play in ensuring the

strength of the Whole Foods brand. There’s no doubt that Amazon’s strategy to use consumer

data to optimize inventory systems, product selections, and the standardization of products is

exactly what Whole Foods needs to make it competitive against the current market. However,

“part of the issue is realizing the limits of standardization… in a store environment, there is a lot

of learning that takes place from employees interacting with customers that can be very localized
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and specific” (“Amazon vs. Whole Foods”). No matter how thorough Amazon’s data analytics

are, it will always fail to capture the unique “context” of the local environment. If that happens,

then Amazon may not only be losing profits but an incredible opportunity to position itself as a

people-oriented brand— a vital asset for an online grocery service targeted at society’s wealthier

segments.

Analysis

The discussion on the importance context plays in data analysis can be applied to this

situation. Amazon’s online business fostered a culture of innovation and efficiency but since

there was little face-to-face interaction, there was no reason for Amazon to build a more

“emotional” connection with its customers. That’s part of why AmazonFresh/AmazonPantry

failed to get the sales it needed— a face-to-face component is vital for grocery chains. Customers

can only gauge the quality of fresh food in person, shoppers all have unique preferences on what

kind of lemons or tomatoes they want, and that power of choice is important to customers in the

purchasing process. Furthermore, “knowledgeable, well-trained sales associates were the

differentiating factor for boomers; 62.7% said this was valuable when choosing one business

over another” (“Shoppers Still Need”). That is why Amazon can’t completely rely on data and

efficiency-driven management to successfully grow both AmazonFresh and Whole Foods, it

takes away the valuable human component of a store. According to Harvard Business School

professors Dennis Campbell and Tatiana Sandino, Amazon could utilize a management style

known as “structured empowerment, where a company standardizes operations but allows

flexibility for employees to make their own choices… where having high-touch contact with

customers matters” (“Amazon vs. Whole Foods”). This strategy takes into consideration that

“perception and emotion are tightly intertwined drivers of human behavior” which is extremely
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important for a business that engages in regular contact with its customers (Rice & Zegart, 163).

If Amazon wants to succeed in the cutthroat environment of the grocery chain business and

especially amongst its target consumer group of affluent individuals, it needs to learn how to

leverage the human component of its business. Just because a decision looks “right” on paper,

doesn’t mean it will mesh well with the perceptions and emotions of target customers. According

to the authors of Political Risk, “good information includes gathering a sense of the heated

feelings and passions of key audiences” (Rice & Zegart, 165). To succeed in the grocery world

for the long run, data-driven businesses like Amazon will need to compromise with Whole

Foods’ empowerment culture to differentiate itself from its competition— and to avoid the risk

of ruining its reputation amongst loyal shoppers. AmazonFresh has “a huge opportunity here for

data to inform and complement human judgment” (“Amazon vs. Whole Foods”). If they can

master that successfully then AmazonFresh and Whole Foods together can revolutionize the

grocery industry.

Conclusion

AmazonFresh/AmazonPantry faced problems due to the nature of the online grocery

chain market. Margins are slim, transportation and delivery are expensive, and shoppers are

skeptical about buying their groceries online. Amazon’s acquisition of Whole Foods was made

with the purpose of solving many of the challenges faced by AmazonFresh and AmazonPantry.

On the other hand, Whole Foods Market was faced with a different set of challenges.

Their people-oriented culture, lack of standardization, and the decentralization of its stores’

authorities caused prices to gradually increase over time. This made it easy for Whole Foods’

competition to provide the same products at better prices. Whole Foods did try to implement

strategies to centralize their control and to improve their inventory chain efficiency— by
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implementing OTS— but due to a lack of advanced technology, they could not catch up to their

competition. That’s most likely why Whole Foods’ CEO, decided to consult Amazon’s CEO to

forge this deal; because Amazon had the technology and experience needed to pull Whole Foods

out of their slump.

Since each of them had what the other lacked, their merger appeared to be a match made

in heaven; however, because of their distinct cultures and management-styles, the merger has

faced many internal obstacles relating to supply chain efficiency and employee morale. Although

these problems stemming from the merger remain, they can be resolved with time and proper

assignment of vital resources.

Both AmazonFresh and Whole Foods are paving the way towards a new landscape for

grocery chains. This case study has shown that for an online grocery chain to thrive and to

potentially become a market leader it must have a hybrid service that offers both a physical

market presence to give customers the “choice of choice” and an online presence for

convenience. However, a hybrid business also calls for a hybrid management style that finds the

middle ground between data-driven results and people-oriented flexibility.

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