Stratechery: Why Did Amazon Acquire Whole Foods?
The answer is: Amazon wanted to buy customers for its grocery service.
Background
-
Amazon's acquisition of Whole Foods = Apple's iPhone defeating Palm
- Do not confuse goals, strategies, and tactics — Apple's strategy:
- It was not about making phones but about producing personal computers
- It was not about adding features to phones but about compressing traditional phone functions into one app
- It was not about replicating the work of carriers but about leveraging its connection with customers
- The iPhone is the most successful product in history = Amazon is the most dominant company in history
- Do not confuse goals, strategies, and tactics — Apple's strategy:
-
Amazon's Goals
- Initially,
Amazon.com
aimed to become a leading retailer based on information products and services, starting with selling books. - Then, Amazon declared, "Our vision is to be Earth's most customer-centric company, where customers can find anything they want to buy online."
- ==Amazon's goal is to gain a share of all economic activities==.
- Initially,
-
Amazon's Strategy
- For businesses: AWS. Assume that all commercial transactions will soon be completed online.
- For customers: Prime. Assume that high costs and diverse choices are unsustainable. With Prime, customers will not consider other alternatives.
- However
- The grocery industry is the largest retail category
- The grocery industry can continuously remind consumers that there are alternatives to Amazon
- However
-
Amazon's Tactics: Develop grocery services
Why Did Amazon Not Arrive at the Right Tactics?
Books | Groceries |
---|---|
High inventory units = wide selection | Low inventory units (30k - 50k) |
Standardized | Varied |
Non-perishable | Perishable |
Amazon's cost disadvantages in fresh produce
- Once scale is insufficient, product spoilage will incur high costs.
- Scale depends on the specific circumstances of each city.
Why does acquiring Whole Foods (rather than others) solve the business scale issue?
==Business fundamental component model + two basic points 1) High fixed costs 2) High returns==
- Deconstruct the infrastructure into Minimum Sellable Units (MSUs)
- These businesses themselves are the first and best customers of these minimum sellable units
- Resell the minimum sellable units
AWS's three-tier architecture
Service | Fundamental Component | S3, EC2, RDS, SNS, ... |
---|---|---|
Platform | AWS | High fixed costs + scale returns |
Infrastructure | Modular Components | Data centers, servers, storage, switches, bandwidth |
- MSUs belong to S3, EC2, RDS, SNS, etc.
- The first and best customer is
amazon.com
- Resell MSUs to non-Amazon developers
Amazon.com
's three-tier architecture
Service | Package | FDA, Amazon Pay, ... |
---|---|---|
Platform | Logistics Center | High fixed costs + scale returns |
Infrastructure | Modular Suppliers | Manufacturers, third-party suppliers, etc. |
- MSUs belong to FDA, Amazon Pay, etc.
- The first and best customer is Amazon's first-party e-commerce
- Resell MSUs to third-party suppliers
The insight here is that Amazon's existing grocery does not have a first and best supplier.
The Perfect Customer
Placing Whole Foods into this framework, we can see that ==what Amazon did was not just buy a retailer, but also acquire a customer for its existing business==.
Amazon.com
's three-tier architecture + Customers
Customer | All categories of food, delivery, restaurants | |
---|---|---|
Service | Groceries | Meat, fruits, vegetables, dry goods, etc. |
Platform | Logistics Center | High fixed costs + scale returns |
Infrastructure | Modular Suppliers | Store brands, name brands, local suppliers, regional suppliers, etc. |
Now, Amazon groceries can serve both Amazon Fresh and Whole Foods, and in the future, this foundational platform can also provide services to restaurants and other food-related entities.