Whole Foods purchase could lessen Amazon’s overall shipping costs

Whole Foods

With over 450 physical locations, Amazon now has the ability to add pickup locations for purchases

In another step into the food space, Amazon has announced it will buy Whole Foods for $13.4 billion plus debt, giving the e-tailer a physical presence in the $700 to $800 billion consumer grocery world. But like many things with Amazon, the end game may be something different.

According to the New York Times, Amazon has been testing retail concepts, including a grocery store concept that could serve as a base for home deliveries. The deal gives Amazon retail outlets that could help it with rising delivery costs as it seeks to increase its food delivery business.

“It brings Amazon a physical footprint,” Bloomberg Intelligence’s Jennifer Bartashus said in an interview. “It gets them out of just being able to deliver in highly dense, densely populated metropolitan areas, which in home delivery, is the only way you can mare that model work.”

Bartashus added that the deal also gives Amazon some institutional knowledge about the grocery business.

“Amazon does not have grocery expertise and if they are looking for Whole Foods to provide that expertise like some of their peers, we’ll see how that plays out in the end,” she added.

Whole Foods, which operates 456 stores in the U.S., Canada and the U.K.,  is known for its organic food offerings, but has struggled in recent years due to the higher prices those foods demand. Earlier this year, the chain replaced five board members amid pressure to improve its performance.

Neil Stern, writing for Forbes, notes that the deal will instantly make Amazon a player in the food business.

“Besides Whole Foods’ $15.6 billion in sales, Amazon has struggled to get Amazon Fresh to be a significant player in the retail food game,” he wrote. “Whole Foods is the most credible player in fresh foods in the industry. Branding an online fresh service with Whole Foods brand and perishables know-how could be a game changer.”

In 2016, Amazon launched Amazon Go grocery stores, but, its Amazon Fresh grocery brand has struggled.

“Online grocery is failing,” Kurt Jetta, chief executive officer of TABS Analytics, a consumer products research firm, told Bloomberg earlier this year. “There’s just not a lot of demand there. The whole premise is that you’re saving people a trip to the store, but people actually like going to the store to buy groceries.”

According to Bloomberg, only 4.5% of shoppers made frequent online grocery purchases in 2016.

From a shipping perspective, Amazon is already losing over $7 billion a year in costs due to free shipping offered with its Prime service. Amazon lost $7.2 billion on shipping last year, according to Geekwire, largely due to its 2-day free shipping with Prime. The company spent $16.2 billion on shipping costs, but generated just $9 billion in shipping revenue.

This may be where the hidden value of the deal may be for Amazon. With consumers still not ready to buy fresh fruits and vegetables online, the shipping costs for Amazon’s Fresh were likely to increase due to lack of volume. Having physical locations may be able to reduce some of those costs, and still get Amazon the foothold it is looking for in the grocery business.

Slate’s Will Oremus explains the benefits and impacts this way for the industry:

“The Whole Foods purchase changes the landscape dramatically. Suddenly Amazon owns a nationwide network of already-popular grocery stores that have already solved the tricky logistical problems involved in sourcing and storing fresh food,” he writes. “What Amazon brings is the world’s largest online sales portal and its mastery of the home-delivery business. Scale, meet scale. Logistics, meet logistics. Loyal customer base, meet loyal customer base.”

It also may be a way to reduce its overall shipping costs. David Brancaccio, writing for Marketplace, is already speculating that the physical locations could serve as pickup locations for items purchased online.

“It's not like they’re coming out of left field, but could you imagine Whole Foods Markets with a little Amazon place to also pick up your Amazon order?” he asks.

In fact, Amazon has been testing new delivery methods for a while in an effort to reduce costs. In some locations, purchases are delivery to central Amazon Lockers, which are opened with a code. The Whole Foods footprint could give Amazon locations to add more Lockers, helping reduce shipping costs further.