Jason Bloomberg, Forbes 

Ever since Amazon.comAMZN +0.11% announced it was acquiring Whole Foods earlier this week, the pundits have been jumping on the story, each one theorizing about Amazon’s motivations for the acquisition.

Some guesses make more sense, in particular, that Amazon wants to expand its grocery business. Others might leave you scratching your head, like the theory that Amazon wants to be more like Wal-Mart StoresWMT +2.12%.

Upon closer analysis, however, even the more popular theories have weaknesses, leaving us to wonder whether Amazon is essentially taking a $13 billion crap shoot – or making the biggest blunder of CEO Jeff Bezos’ career.

 

Peeling Back the Layers of the Whole Foods Onion

Our starting point: the official Amazon party line. “Millions of people love Whole Foods MarketWFM +0.18% because they offer the best natural and organic foods, and they make it fun to eat healthy,” crows Bezos in the official Amazon press release. “Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.”

Bezos is clearly playing his cards close to the vest here, as he is saying nothing that would indicate why a global ecommerce leader would be interested in a supermarket chain. In fact, this statement appears so baldly disingenuous that one wonders whether a committee of PR wonks actually wrote it, rather than Bezos himself.

Nevertheless, the most likely explanation for the acquisition is that Amazon wishes to expand its grocery business – not simply by adding bricks-and-mortar supermarkets, but by expanding its core ecommerce efforts in this category.

The question then is: why Whole Foods, rather than a more mainstream supermarket chain like KrogerKR +1.94% or Albertson’s? After all, Whole Foods’ business model is fundamentally broken in many ways: its ‘whole paycheck’ prices are too high, its selection is poor, and many of its products are based on quackery, targeting a gullible customer base who believes, for example, homeopathy is something other than pure nonsense.

When you strip away Whole Foods’ weaknesses, however, you’re left with a small handful of strengths. Perhaps the most appealing of these is the grocer’s upscale demographics – especially considering they overlap the audience for the popular Amazon Prime service. “Whole Foods currently records ~8 million weekly customer visits, and has 30 million customers – which we believe overlaps significantly with Amazon’s projected 60 million domestic households,” according to a report by JP Morgan. “With Whole Foods, Amazon now has 464 stores in markets that we believe have significant overlap with Prime customers as the broader grocery market transitions online at what we believe is likely to be at an accelerating pace.”

Why, then, would it be important to Amazon to serve its existing Prime customers at Whole Foods? One likely answer: an omnichannel combination of online and in-store goods, where customers can come into their local Whole Foods and pick up their entire Amazon order – food, books, and everything else at once.

The synergies with Amazon’s technology are clear. “Amazon has an opportunity to give Prime members automatic entry in a new Whole Foods benefits program,” says Brent Franson, CEO of retail analytics firm Euclid Analytics. “They could also offer the option to pay for groceries using the Amazon app, or sync your Alexa-made grocery list with your app while in-store.”

Brian Solis, principal analyst at Altimeter, takes the omnichannel story one step further. “We will see a renaissance in physical space and a new paradigm for online shopping that merges intelligent technologies, hyper-personalization, and seamless cross-channel engagement,” Solis says.

Perhaps – but Solis’ notion of hyper-personalization, what we call individualization at Intellyx, may be central to Amazon’s customer experience strategy generally, but it’s not clear how it would translate to a Whole Foods store. After all, every logged in user sees an individualized web page when they go to Amazon’s web site, but everyone who walks through the door of Whole Foods sees much the same thing as everyone else.

Is it about Home Delivery?

Since Walmart is rolling out its own order online/pick up in store service, perhaps Amazon is looking to do the same. For most Amazon customers, however, home delivery is the preferred method of receiving merchandise.

Perhaps the Whole Foods acquisition is about home delivery? “Consumers are becoming accustomed to getting pretty much anything they want delivered right to their door today, just by clicking ‘Confirm and Pay,’ ” says Roger Beahm, WestRock executive director of the Wake Forest University Center for Retail Innovation. “Having perfected this buying behavior in categories such as books and apparel, it’s not hard to visualize consumers getting to a similar tipping point in retail grocery once the logistics are there.”

Whole Foods has already been experimenting with home delivery, so it might make sense for Amazon to see its stores as mini-warehouses that can support such a service.

In fact, Amazon has also been exploring a similar distributed fulfillment model. “It’s usually no more scientific than here’s where our fulfillment center is, let’s start with the zip codes right around, and just keep extending that,” according to Amazon SVP of North American retail Doug Herrington.

Is it about the Supply Chain?

While some of the pundits focus on the customer experience, most of them consider the grocery supply chain to be at the heart of Amazon’s strategy for buying Whole Foods. Unfortunately, they can’t agree on why.

Perhaps Whole Foods brings supply chain capabilities to Amazon that it has struggled to implement for itself? The focus of this line of reasoning is on the cold chain: the supply chain for perishables like produce, fresh fish, and dairy products.

It’s true that the cold chain has been a challenge for Amazon up to this point (as the screenshot illustrates), but the question remains whether Whole Foods’ supply chain can address its problems.

As with most supermarkets, the cold chain consists of numerous small vendors who are frequently local – one might deliver fish while another transports tomatoes and a third brings milk.

Perhaps Amazon is interested in the Whole Foods supply chain only to reinvent it – but then, why pay so much for something broken you only have to fix? “Amazon.com Inc.’s nearly $14 billion bid for Whole Foods is about more than just acquiring a means to sell high-end food products online. It’s about busting the supply chain in an ancient business,” opines author and fellow Forbes contributor John F. Wasik. “Amazon, with its massive regional distribution centers that are often larger than shopping malls, could cut out most wholesalers.”

The Whole Foods supply chain, however, is far from monolithic. It sources many of its perishable and specialty products from a web of suppliers, a business Amazon would likely be able to reinvent – but possibly at the cost of what makes those particular products special for customers.

The rest of Whole Foods products, namely the bulk of its nonrefrigerated packaged goods, it obtains through a traditional natural foods supply chain intermediary, United Natural Foods, Inc. (UNFI).

True, Amazon could replace UNFI, but it’s not clear there would be much business benefit to doing so, as UNFI is already a low-cost partner. “To think that UNFI is somehow fleecing Whole Foods by hundreds of millions of dollars – it really doesn’t make a lot of sense,” according to Scott Mushkin, managing director at Wolfe Research.

Roger Davidson, president of Oakton Advisory Group and a former executive at Walmart, Wild Oats Markets, and SupervaluSVU +15.08%, echoes Mushkin’s perspective in the same article. “It would be a mammoth undertaking to create their own supply chain,” Davidson says.

Supply chain experts doubt that Amazon would be up to the task of reinventing the Whole Foods supply chain anyway, pointing to the fact that most of the products Amazon sells today come from third-party sellers. “52% of Amazon is not even Amazon, it is FBA (Fulfillment by Amazon),” says Jim Tompkins, Chairman and CEO at Tompkins Internationalnull +0% supply chain consulting. “FBA allows Amazon to double its volume through the economies of scale and get an opportunity for some synergistic collaboration, which allows them to afford a higher level of automation that is economically justified with more local distribution and fulfillment capabilities.”

Perhaps by biting off the Whole Foods supply chain, Amazon now has more than it can chew? “The grocery industry is a completely different game when compared to items like books, media and electronics,” explains Natan Reddy, a tech industry analyst at CB Insights. “Food delivery services on the whole are considerably more logistically complex.”

The Missing Link

Perhaps Amazon’s challenge isn’t to make Whole Foods’ supply chain more like Amazon’s, but rather vice-versa – warts and all. After all, there are certain elements of its supply chain that Whole Foods customers value and are willing to pay extra for, in particular, how it handles fresh fish and coffee.

The secret: a transparent supply chain, from producer all the way to the store. “There’s a subset of customers—I think it’s a pretty big subset—that when you’re talking about things that go in or on your body, or in or on your children’s bodies, they really care about that supply chain,” Bezos says.

This supply chain visibility, however, is only part of the challenge. “Like browsing for books in a store, touching (and then cooking) the food that you put in your body is one of the few exclusively human experiences that we need to preserve,” Forbes contributor Wasik continues. “Amazon may change the economics of this process in a profound way, but it will need to pay attention to the sensual dynamic at play.”

We thus have two competing stories in play: streamlining the supply chain along modern digital lines to deliver speed and convenience to customers, vs. bringing a high-touch, upscale supply chain to the segment of customers who value such an approach.

Which one Amazon will end up with is anybody’s guess – even Amazon’s. “Trial and error, and finally you find a success,” Bezos says. “And that takes long-term thinking.”

In the final analysis, then, it’s possible that Amazon is making a strategic error with the Whole Foods acquisition, and it is certainly taking some risks – but for Jeff Bezos and his team, the game isn’t a crap shoot. It’s a game of chess, and Amazon is thinking three moves ahead.