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

• Amazon's Goals

  1. Initially, Amazon.com aimed to become a leading retailer based on information products and services, starting with selling books.
  2. Then, Amazon declared, "Our vision is to be Earth's most customer-centric company, where customers can find anything they want to buy online."
  3. ==Amazon's goal is to gain a share of all economic activities==.

• 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

• 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

1. Once scale is insufficient, product spoilage will incur high costs.
2. 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.