Amazon’s Whole Foods purchase increases its distribution channels

 Whole Foods network includes refrigerated warehouses, which Amazon could leverage to shorten its fresh foods supply chain.

Whole Foods network includes refrigerated warehouses, which Amazon could leverage to shorten its fresh foods supply chain.

With refrigerated distribution warehouses, Whole Foods opens the door to growth in Amazon’s food delivery business

Amazon sent shock waves through the grocery business on Friday with its announcement that it will acquire Whole Foods in a deal valued at $13.7 billion, which includes assumption of Whole Foods’ debt. But the purchase may be giving Amazon something even more valuable than Whole Foods' customers - a distribution network.

“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and CEO. “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.”

The deal gives Amazon something that it has been lacking in its push to expand its grocery business Amazon Fresh and also a leg up on Walmart, which according to at least one report was best positioned to handle the growing online grocery business.

“Based on our analysis, we determined that Wal-Mart was the winner (low exposure to Amazon Fresh/Prime Now markets and low EPS impact from exposure to those exposed markets)," Citi Research said. “Whole Foods Market came in last place overall in our analysis, largely due to their urban store exposure, which overlaps highly with Amazon Fresh and Prime Now, as well as their higher price points.”

The deal is bad for FedEx and UPS as food will drive delivery density within the in-house Amazon last mile operation. Essentially they will layer parcels on top of the food delivery network.
— John Larkin, managing director of transportation and logistics for Stifel Equity Research

Citi noted that 60% of Whole Food stores currently overlap with existing Amazon delivery markets while Walmart stores are located in just 23% of Amazon’s delivery markets.

Kroger also scored well in the Citi report, however, if Amazon is able to significantly grow its grocery business, Kroger, Target (which gets about one-third of its sales from grocery) and other grocers will feel pressure of falling sales, and truckload carriers contracted with those retailers could feel added rate pressure as volumes decline.

“Amazon will eventually be moving most of its freight in dedicated networks through local distribution points that have the option of self pickup,” Noel Perry, truck and transportation expert with FTR Intel, told FreightWaves. “This will reduce parcel volume [and] Whole foods will be an early example of this. It is good for the customers in that it reduces dependence on expansive parcel shipping. [Whether] it's good for industry participants depends on one's point of view.”

Online grocery shopping is predicted to grow into a $100 billion industry by 2025, according to a forecast from Food Marketing Institute and Nielsen.

And that burgeoning market is one that Amazon wants a major piece of. The acquisition of Whole Foods now gives Amazon a retail footprint and distribution facilities that include refrigeration, which will shorten its supply chain for Amazon Fresh products. Whole Foods has about 430 stores plus distribution facilities, many in areas where Amazon is already popular.

“It’s going to give them little warehouses all around the country in some of the big markets,” Michael Knemeyer, a professor of logistics at Ohio State University’s Fisher College of Business, told the Wall Street Journal.

Dave Beaird, a supply chain consultant, told the Journal that Whole Foods refrigerated storage space is a big boost to Amazon’s home delivery business.

“Setting aside food, the larger opportunity to build out what many refer to as the final mile to the consumer is now in sight,” he said. “Will these locations become mini-fulfillment centers to help execute local deliveries of not only food but also other items? Will these locations become hubs for customer pickup, decreasing some traditional transportation last mile costs? Or will they simply remain as they are today? Which is very hard to believe.”

Third-party home delivery food businesses such as Home Chef and Hello Fresh have been growing quickly in recent years. In response, retailers have been testing several models. Walmart and Kroger have been at the forefront of this, testing several models for online grocery shopping, including in-store pickup and using third-party delivery services.

"Both models are going to thrive in 2017 and 2018," said Diana Sheehan, director of retail insights for Kantar Retail, said in a CNBC interview. "I would actually predict that within 3 to 5 years — maybe sooner — that we would start to see some of these third parties getting acquired by major retailers."

Shipt and InstaCart are among the third-party services retailers have been using to deliver their grocery products.

“We’re still in the test-and-learn phase,” Edward Yruma, an analyst with KeyBanc Capital Markets, told CNBC, adding that Amazon’s decision to open brick-and-mortar stores may indicate that shoppers prefer physical locations rather than online for groceries.

That may have played a role in Amazon’s decision to purchase Whole Foods, especially given the overlap of markets between the two brands. An impact on the freight markets are inevitable, with UPS, FedEx and the U.S. Postal Service expected to watch the trend carefully.

“The deal is bad for FedEx and UPS as food will drive delivery density within the in-house Amazon last mile operation,” explained John Larkin, managing director of transportation and logistics for Stifel Equity Research. “Essentially they will layer parcels on top of the food delivery network. The deal will be good for reefer TL carriers as Amazon's ownership of Whole Foods will accelerate the general trend towards folks eating fresh, organic foods. These shipments can be longer length of haul given the seasonal effect and the specialty nature of growing regions.”

It is also possible, said Benjamin Gordon, managing partner at BG Strategic Advisors LLC, that Amazon will adopt the same strategy for Whole Foods goods as it is adopting for its general business – direct ship from suppliers to customers.

“The opportunity to do direct to home [delivery] with Whole Foods, as well as the suppliers to Whole Foods, could become dramatic,” he said. “You could keep the stores, but all the growth might come from distribution center to home.”

Grocery is currently 56% of Walmart’s U.S. sales and 59% of Sam’s Club’s sales, according to Stifel research.

The stocks of grocery retailers took a tumble on Friday following the announcement. Walmart (6%), Target (10%), Kroger (14%) and Ahold Delhaize (10%), the parent company of Food Lion and Giant supermarkets, all dropped. Sprouts Farmers Markets, a rival of Whole Foods, fell 14% and even Costco stock tumbled 8%.

According to CNN Money, over $29 billion in market value was lost on Friday.


Brian Straight

Brian Straight has covered the U.S. trucking and transportation community for more than 10 years, winning numerous regional and national editorial awards, including a Jesse. H. Neal Award. Prior to working on FreightWaves, Brian spent 10 years at industry trade magazine Fleet Owner, and prior to that managed daily newspaper editorial operations.