Business

Whole Foods deal fits into Amazon’s plan to offer one-stop shopping

Amazon chief executive Jeff Bezos.

Ted S. Warren/Associated Press/File 2014

Amazon chief executive Jeff Bezos.

Online retailer Amazon.com’s decision to buy Whole Foods Market Inc. and its chain of brick-and-mortar supermarkets is a lot less shocking than it sounds. In fact, some industry analysts say a deal like this was inevitable. Amazon, they say, needs hundreds of traditional retail stores before it can fulfill the ultimate ambition of founder Jeff Bezos — to become America’s dominant shopping destination for pretty much everything.

The reason is simple: Despite the hype, Americans don’t spend all that much online. According to the US Census Bureau, Americans last year spent $395 billion at Internet stores, or about 8 percent of total retail purchases. Amazon was the big winner, posting US net sales of $90.3 billion. But that’s just 2 percent of the $4.8 trillion in US retail spending last year.

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“The problem with e-commerce is there’s just not the consumer demand,” said Kurt Jetta, chief executive of TABS Analytics, a consumer products research firm in Shelton, Conn. “In general, it’s not as big as people say it is.”

By paying $13.7 billion for Whole Foods and its 460 retail stores, Amazon can reach millions of shoppers in the real world. It’s the company’s biggest foray into physical retail stores, but not the first. Amazon has opened several bookstores in the United States, including one in Dedham. The company also is developing Amazon Go, a new kind of convenience store that would eliminate the need for human cashiers. The first such store was supposed to open in Seattle this year but has been delayed because of problems with the customer tracking technology.

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In addition, the New York Times in March reported Amazon is considering stores that would sell furniture, electronic devices, and appliances.

While Amazon is serious about brick-and-mortar retailing, Brendan Witcher, principal analyst at Forrester Research in Cambridge, said the company will leverage Whole Foods as a way to win more online business. Witcher said many Amazon customers buy an item or two every now and then. But everybody buys food at least once a week. “When Amazon wins the weekly shopper, they have the opportunity to sell them everything,” he said.

Amazon’s archrival, Walmart, already uses its stores to attract online customers. Hundreds of US Walmarts offer a “click and collect” service. Shoppers can order merchandise online, then pick it up at the same Walmart store where they buy their milk. It’s designed to create loyal Walmart consumers, both offline and online. The acquisition of Whole Foods lets Amazon offer a similar service, to keep its existing shoppers loyal and to attract new ones.

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But Jetta warned that to get the most of the Amazon-Whole Foods deal, “They’re going to need to do something to expand their appeal beyond the high-income urban millennials.” He said about 45 percent of Americans making more than $100,000 a year shop at Whole Foods or Amazon, compared with just 20 percent of those who earn less. Amazon has already taken this to heart; last week the company said it’s cutting the price of its Amazon Prime subscription shopping service from $10.99 a month to $5.99 a month for people receiving welfare benefits or food stamps.

Not everybody was favorably impressed by the Whole Foods deal. “It doesn’t make a lot of sense,” said Michael Cusumano, a professor at the MIT Sloan School of Management. Selling groceries, he said, is “not a good business to be in for anyone.”

Cusumano noted that the supermarket business delivers famously thin profit margins, averaging 1.89 percent last year, according to data from New York University’s Stern School of Business. He noted that Amazon has prospered by not saddling itself with retail real estate and large inventories of perishable products, but by purchasing Whole Foods, “it brings them into the margins of the grocery business.”

Barry Lynn, director of the Open Markets Program at New America, a liberal think tank in Washington, said federal antitrust regulators should step in to block the Amazon-Whole Foods deal.

“This is just a straight up monopolization,” Lynn said. “They’re leveraging their dominance of e-commerce to now take over physical retail, to drive physical retailers out of business. And they’re doing a damn good job of it.”

But Jetta said traditional grocers won’t be overwhelmed by Amazon’s arrival on their turf.

“For context, Walmart built 3,500 supercenters in this country,” Jetta said. Yet despite that kind of market saturation, other supermarket chains like Kroger’s, Albertson’s, and Stop & Shop weren’t blown away, he said. “They are still in place and probably stronger than ever,” Jetta said.

Hiawatha Bray can be reached at hiawatha.bray@globe.com. Follow him on Twitter @GlobeTechLab.
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