COLLIERS MINNESOTA

Decoding the Whole Foods Amazon Deal

 

One of the major business headlines of the past several months was the announcement of Amazon's purchase of Whole Foods. Both Whole Foods and Amazon are leaders in their respective retail sectors; grocery and e-commerce. The transaction is valued at $13.4 billion, and turned the online shopping giant into a major player in the brick-and-mortar retail space overnight. The merger is a recent example of a company's desire to embrace both the online and physical shopping experience. In the case of Amazon, the merger represents a move to leverage the benefits of both experiences, to make a brand that is greater than the sum of its parts. 

Whole Foods has roughly 460 stores in the US, Canada and the UK and reports annual sales of just under $16 billion. While this sales number seems large, in the $800 billion+ annual US grocery market, their overall market share is actually quite small. In addition to sales figures, Whole Foods has an interesting draw to a potential buyer; their unique customer base.

Whole Foods, first and foremost, touts an organic and natural product offering, which attracts a specific type of consumer. Combine this unique product offering with highly-strategic store locations and one can begin to understand the motivation behind the merger. Starting with site selection, Whole Foods has focused their locations on urban cores and higher income suburban neighborhoods throughout the country. One-fourth or 75 million Americans currently live within 3 miles of a Whole Foods. An impressive statistic, considering there are only 440 stores in the U.S. However, even more impressive, is how the grocery giant has placed stores where the demographics within a 3-mile radius have a significantly higher income bracket than on the outside. A recent Quartz study found that one-third of all U.S. households with annual incomes of over $100,000 live within a 3-mile radius of a Whole Foods store.

Therefore, the purchase of Whole Foods puts Amazon squarely into key, high-earning zip codes and positions Amazon to win with this highly sought-after consumer base.

The merger, in theory, will allow Amazon to tap into that larger discretionary income and spending of the Whole Foods consumer base. But how can Amazon do this? Experts predict that Amazon will leverage a version of the Prime subscription at Whole Foods to receive certain benefits like grocery pickup, delivery, discounts and coupons, as well as special, exclusive membership perks. Amazon knows that once a consumer becomes a member of the Amazon Prime family, their value increases significantly.

 

For example, a survey conducted by RBC Capital showed that 73% of Prime customers shopped on Amazon at least 2-3 times per month. While only 22% of non-Prime customers shopped on Amazon with the same frequency. If Amazon can incentivize customers to join their Prime program through Whole Foods, they can be confident that members will consume more Amazon products and services in the future.


The Prime subscriptions themselves have a real, tangible value as well. Sales results from 2016 showed that an estimated $6.4 billion was made off subscription fees alone. This gives the company the opportunity to take lower margins on other products, leading to a new lower price point while remaining profitable.


The Amazon Prime membership model should concern competing retailers. The competitive pricing that Whole Foods will be able to offer with the income generated from memberships is dangerous to competitors trying to price match. Also, the vast product offerings Amazon has to offer could change the face of grocery, for example, adding in electronics next to the seafood counter.


However, it is important to point out that every one of the existing Whole Foods stores is a leased location. Part of each lease includes any number of restrictions in what tenants can or cannot sell, known as use clauses. Also, every location is in a different center with owners and tenant mixes. Therefore, their 440 leases will have different "use clauses" that are allowed. With this reality, it will be difficult for Amazon to fully begin selling non-grocery items at Whole Foods locations. Making each store fundamentally different would run counter to the hyper-efficient model Amazon is known for. In distribution, uniformity makes money. Similar issues would arise if they tried to implement a widespread network of in-store-pickups. Existing infrastructure, local zoning and use clauses would render the plan difficult to execute.


In the end, is this merger good for all of retail now that the top e-commerce giant is throwing their hat in the brick-and-mortar ring? How much could they truly disrupt the industry?


It appears that Amazon understands that the value in acquiring Whole Foods is supplying a name brand entrance into the red-hot grocery market, with the hope of feeding more customers into their existing platform. They will not be able to turn the stores into pick-up only distribution centers or general merchandise stores.
Through e-commerce, Amazon is at the forefront of changing the way customers fundamentally shop. Ultimately, it appears that the change will be alongside of brick-and-mortar stores, not instead of them.

 

See the full report here: Colliers MSP Q2 Retail Market Report

 

Molly Townsend

Senior Associate

Colliers International | Minneapolis - St. Paul

Connect with Molly

Share on Facebook
Share on Twitter
Share on LinkedIn
Please reload

FEATURED POSTS

September 6, 2019

Please reload

Untitled design (29).png
  • LinkedIn Social Icon
  • Twitter Social Icon
  • Instagram Social Icon
FOLLOW THE FUN ON INSTAGRAM
Colliers_Logo_PMS_Rule_Flat.png
  • White LinkedIn Icon
  • White Twitter Icon

ABOUT COLLIERS MINNESOTA

Defined by our spirit of enterprise, Colliers Minnesota is a leading, full-service commercial real estate services organization.  We are dedicated to providing clients with innovative real estate solutions and the most comprehensive market knowledge. We specialize in understanding our client’s unique business needs in every commercial property type.

Headquartered in the Twin Cities with regional offices in Minnetonka, Minneapolis and Shoreview, Minnesota, Colliers International | Minneapolis-St. Paul consists of more than 240 local professionals. Our expertise extends into every aspect of today’s commercial real estate business including architecture, brokerage, facility services, investment sales, project management and property management.

Globally we are represented by more than 15,000 Colliers International professionals operating out of 502 offices in 67 countires.