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It’s Finally Clear Why Amazon Bought Whole Foods

Three sealed paper grocery bags bearing the Amazon Prime and Whole Foods logos
Photo illustration by Slate. Photo by Smith Collection/Gado/Getty Images.

The following article is a written adaptation of an episode of Thrilling Tales of Modern Capitalism, Slate’s podcast about companies in the news and how they got there.

In 2017, Amazon entered the grocery business by tossing Whole Foods in its shopping cart. Amazon spent more than $13 billion to buy this 40-year-old supermarket chain known for its organic merchandise and, at times, its sky-high prices. In the grocery world, the purchase was a cataclysmic event. “The acquisition of Whole Foods was the alarm bell that started all these multibillion-dollar investments in digital grocery capabilities,” says Jon Springer, executive editor of the trade publication Winsight Grocery Business. “It was like, Oh, my God, we’ve got to do something about this.

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The COVID pandemic shifted the industry’s focus toward food delivery, which only played further into Amazon’s strengths. And now, people in the world of groceries, people on Wall Street, just people in general, are extremely curious about Amazon’s supermarket ambitions, given the company’s habit of taking a wrecking ball to any market it gets involved with. “Everything is done differently today because of Amazon, and the grocery industry is one of the last industries to come under that influence,” Springer says.

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Whole Foods itself revolutionized that industry. From one health food store in Austin, Texas, that opened in 1980, it became a household name and changed the entire conversation around groceries. Gary Fine, a former Whole Foods employee, says, “Whole Foods was a mission-driven company, and the mission was to change the world, have good stuff, and to change the way people eat. Well, you know what? They won. They won. You can get organic food, you can get natural foods everywhere, you can go to your little corner grocery store, you go to Safeway.”

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But the demand for organic, natural food created a new problem for Whole Foods: Other supermarket chains were upping their game. And that competition could take advantage of the fact that Whole Foods—or, as people called it, Whole Paycheck—had gotten a reputation for high prices. Conventional grocery stores began to replicate Whole Foods’ organic offerings, but much cheaper. In 1997, Whole Foods started a private label line of products it called 365 Everyday Value. The idea was to offer some more affordable items—but it wasn’t enough. By the mid-2000s, CEO and co-founder John Mackey realized that Whole Foods no longer stood out from the crowd. He said in a 2004 interview, “When we started out, our ideas were really on the fringe of the culture. And what’s happened over time is they’ve migrated from the fringe to sort of the cool and hip. And now it’s entering into the mainstream.”

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Whole Foods had expanded rapidly, far and wide, on the basis that it brought something new to every neighborhood it opened a store in. But once the mainstream caught up to what Whole Foods was doing, and began to do it cheaper, the company’s luster started to fade.

In 2006, Whole Foods stock dropped almost 40 percent as competition ate into its sales. In 2008, in the midst of the financial crisis, the stock went down 76 percent, and John Mackey sold a piece of the company to a private equity group. Whole Foods bumped along for the next several years, but it faced increasing pressure from unhappy investors. And according to Jon Springer, the problem the company was up against was simple: The competition got stronger. “Consumers no longer had to go to Whole Foods to get what you could find in Whole Foods.”

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Conventional grocery chains like Safeway and Kroger, with their bigger scale and often greater efficiency, were offering organic food at cheaper prices in stores that were right around the corner from consumers all over the country. Once upon a time, Whole Foods had been able to defeat competitors by buying them up. But these rivals weren’t like those independent health food chains. They were bigger and well resourced, and they knew how to compete. Whole Foods was struggling. “They were pretty much up against the wall here,” Springer says, “and Amazon kind of came out of the blue and said, ‘Here’s what we’re going to pay for you. Let’s make a deal.’ And apparently it came together very quickly, and that was a big relief for them.”

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According to Springer, the sale “was received as a monumental blow” in the grocery industry. “Stock of all the conventional supermarkets and the Walmarts of the world just got devastated by this one announcement.” The fear wasn’t so much about what Amazon would do with Whole Foods specifically; it was just the fact that big, bad Amazon was finally entering the grocery business in a major way.

For Amazon, acquiring Whole Foods was in part just a way to encourage people to sign up for Amazon Prime memberships, joining Amazon’s powerful loyalty program in exchange for discounts on their groceries. But there’s more than that. A lot of people think Amazon saw buying and operating Whole Foods as a way to learn about the world of groceries and then to use that knowledge to launch a larger, more mainstream grocery chain. Now the company may be taking its first steps toward doing just that: New stores are popping up around the country under the Amazon Fresh banner. “People anticipate that Amazon will roll out hundreds of these Fresh stores, not just dozens but hundreds, in the years to come,” Springer says.

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Amazon Fresh stores tend to be smaller and less extravagant than Whole Foods stores are, and they come without any of Whole Foods’ baggage. “They’re a little bit more locally focused,” Springer says. “They’re cheaper to build and run, and they don’t come with built-in reputational issues or expectations that a Whole Foods does, in terms of you’re expecting a special experience at Whole Foods and if they fall short of that, that’s a problem. They’ve got a price reputation to overcome in the consumer’s mind that an Amazon Fresh wouldn’t necessarily have, and it’s not any more difficult or probably easier in some ways for Amazon to bring to bear the power of their Prime program to a brand-new store rather than trying to fit it over a store that was developed for a different purpose.”

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But a massive nationwide chain of Amazon Fresh stores might not even be the end goal for Amazon. Those Fresh stores might just be Trojan horses for Amazon’s actual goal, which is same-day grocery delivery to everybody, everywhere. Online grocery shopping has been Amazon’s white whale for some time now. Groceries make up a consistent chunk of most people’s spending, and they’re kind of the only online shopping niche that Amazon hasn’t yet been able to dominate. Before the COVID pandemic, online purchasing was only 2 or 3 percent of the $800 billion grocery business. Since the pandemic started, it’s been hovering closer to 10 or 11 percent. Even as the pandemic recedes, people expect online grocery buying to keep ramping up. But it’s a tricky business.

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Springer explains: “With food, you’ve got multiple temperatures. You have cool, frozen, fresh, delicate items, grapes, bananas, things that can crush that need to be handled by somebody. The grocery store is such a great, resilient thing because it’s efficient. They’re near your homes. You provide the labor to pick the items and to pick out the particular ones that you want. So when you go online and order your groceries, now you’re trusting somebody or something else to make those picks for you, to make sure that the cold stuff stays cold, to make sure that the frozen stuff stays frozen, in the time it takes to get it to your home. It is a really complicated thing. And again, what Amazon saw in their experiments was that this was going to be difficult to do from a centralized warehouse in a 150-mile radius. We need to come very close to the consumer. That’s the advantage that the grocery stores have.”

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A huge expansion of Amazon Fresh stores might be a traditional grocery chain play, but it’s also a way to get food-specific warehouses into every neighborhood, ready to fulfill online grocery orders that people make through, of course, their Amazon accounts. But as Amazon attempts to scale up its grocery business, it’s meeting a familiar foe. Walmart once followed Amazon into online shopping, hoping to catch up. And now Amazon is chasing Walmart, the No. 1 food seller in America, when it comes to the grocery game. As Springer puts it, “they have what the other lacks, essentially. Walmart’s got 2,800 stores or something like that in the U.S. and a developing e-commerce business. And Amazon’s got the e-commerce business and a small handful of stores.”

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So here we’re talking about two corporate behemoths doing battle to consolidate and dominate the fastest-growing sector of the grocery business. We’ve come a very long way from a 25-year-old vegetarian in Austin opening the first Whole Foods Market. Of course, John Mackey was always really more of a business guy than a hippie. He grew Whole Foods through rapacious acquisitions. He catered to Wall Street and to private equity. He’s been open about the fact that he’s not a fan of labor unions. Maybe an Amazon acquisition was always his destiny.

Listen to the full episode using the player below, or subscribe to Thrilling Tales of Modern Capitalism on Apple Podcasts, Overcast, Spotify, Stitcher, or wherever you get your podcasts.

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