Communications of the ACM
Amazon and Whole Foods: Follow the Strategy (and the Money)
Credit: Alicia Kubista / Andrij Borys Associates
In June 2017, Amazon announced it would acquire Whole Foods, the national grocery chain with nearly 500 stores, for $13.7 billion in cash. This is less than Whole Foods' 2016 revenues of $15.7 billion, which included $507 million in net profits (3.2% of revenues). Whole Foods became a takeover target because of declining sales and profits as well as increasing competition in the cutthroat supermarket business.1 By comparison, Amazon's 2016 revenues were $136 billion, up 27% over 2015, with operating profits of $4.1 billion and net profits of $2.4 billion (1.8% of revenues). Amazon's market value of around $480 billion is 3.5 times last year's revenues. It is buying Whole Foods for less than one times its last year's revenues (0.85%). Given that Whole Foods is actually more profitable than Amazon, which plows most of its potential profits into new business development and expansion, and since Amazon does not have to dilute its stock, this seems like a great deal for CEO Jeff Bezos. But is it? And what does this acquisition say about Amazon's strategy?
Launched by Bezos in 1994 as a pioneering online bookstore, Amazon has always made deft use of physical assets as well as the Internet. It soon offered two million or more titles—far more than actual bookstores were able to stock. Later in the 1990s, Amazon added a platform service that linked buyers who wanted less-popular books with third-party sellers that held the inventory, a business now called Amazon Marketplace. Unlike Google and other Internet platforms, Amazon was never a completely virtual business. Bezos operated out of a warehouse that intercepted shipments from distributors and then re-sent the books to customers. The company also began to buy large numbers of best-seller books and stock them so Amazon could benefit from scale economies in purchasing and earn premiums from delivering the books quickly.
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