Stratechery: Why amazon acquired whole foods?

Answer: Amazon wanted to buy a customer for its grocery services.

Background

• Amazon acquiring Whole Foods = Apple’s iPhone beating Palm

  • Don’t misunderstand goals vs strategies vs tactics - Apple’s strategy
    • is not to build a phone but to build personal computer
    • is not to add functionalities to a phone but to reduce the phone to an app
    • is not to duplicate the carriers but to leverage their customer connections
  • iPhone is the most successful product of all time = Amazon is the most dominant company of all time

• Amazon's Goal

  1. Initially, Amazon.com’s objective is to be the leading online retailer of information-based products and services, with an initial focus on books.
  2. Then, it says "our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online."
  3. ==Amazon’s goal is to take a cut of all economic activity.==

• Amazon's Strategy

  • to enterprise: AWS. Assuming that all businesses will soon be Internet-enabled businesses.
  • to customer: Prime. Assuming that superior cost/and/superior selection are not sustainable. With prime, alternatives won’t be even considered by customers.
    • However
      • grocery is the largest retail category.
      • grocery is the most persistent opportunity for reminding users there are other alternatives.

• Tactics: develop grocery services

Why hadn’t Amazon figured out the right tactics?

Book	Grocery
high SKUs = large selection	less SKUs(30k - 50k)
standardized	vary in quality
imperishable	perishable

AmazonFresh’s cost disadvantage

1. High costs of perishable items if not scaled
2. Scale needs to be based on cities

Why can acquiring Whole Food (not doing other things) solve the scale problem?

==Primitives model for business with 1) hight fixed costs 2) high returns to scale==

• decouple infrastructure into Minimal Sellable Units (MSUs)
• business itself is ==The First-And-Best Customer== of those MSUs
• resell MSUs to the outside

AWS Three Layers

Services	Primitives	S3, EC2, RDS, SNS, ...
Platform	AWS	High Fixed Costs + Returns to Scale
Infrastructure	Modularized Components	Data center, Servers, Storage, Switches, Bandwidth

• MSUs are S3, EC2, RDS, SNS, etc
• The First-And-Best Customer is amazon.com
• resell MSUs to non-Amazon developers

Amazon.com Three Layers

Services	Packages	FDA, Amazon Pay, ...
Platform	Fulfillment Centers	High Fixed Costs + Returns to Scale
Infrastructure	Modularized Suppliers	Manufacturers, 3rd Party Merchants, ...

• MSUs are FDA, Amazon Pay, etc.
• The First-And-Best Customer is Amazon first-party e-commerse
• resell MSUs to 3rd party merchants

The insight here is that grocery business has no first-and-best customer.

Perfect Customer

After fitting in Whole Foods to the big picture, we can see that ==Amazon is buying more than a retailer - it’s buying a customer==.

Amazon.com Three Layers + Customers

Customers		Whole Foods, Delivery, Restaurants
Services	Groceries	Meat, Fruit, Vegetables, Non-perishables, ...
Platform	Fulfillment Centers	High Fixed Costs + Returns to Scale
Infrastructure	Modularized Suppliers	Store Brand, Name Brand, Local Suppliers, Regional Suppliers, ...

Now Amazon Grocery Services can serve AmazonFresh and WholeFoods, and then in the future restaurants or whatever can consume it.