Evaluating the deal

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The blockbuster announcement was made last week: Amazon is purchasing Whole Foods for $13.7 billion. Kelly Sayre, analyst for the IHL Group, shared the five reasons why this is good for both parties.

  1. Amazon’s greatest Achilles heel right now is they are losing $8 billion a year on shipping costs. This gives Amazon 431 locations nationwide, in mostly higher-income neighborhoods, for package pickup and returns. Keep in mind, shipping to the door is causing many problems for Amazon with theft; some apartment buildings in inner cities are now overrun with packages. The second biggest issue area of friction for Amazon is the cost and time to make returns. Finding a box, being charged for shipping if the reason for the return is not adequate, etc. — these areas cause people to think twice before buying. With this acquisition, customers can simply bring the opened box items with receipt to Whole Foods and they will take care of returning items in bulk. This removes friction from the return process and allows for Amazon to also mitigate some of the advantage that Walmart has had with ship to store (and offering discounts).
  2. Over 70 percent of U.S. households earning $112,000 a year have an Amazon Prime account. There is a very high correlation between these shoppers and those who go to Whole Foods. There is mounting evidence that wealthier consumers are no longer choosing luxury items like cars and boats to show status, but rather leveraging healthier food choices and education options as class markers. The acquisition provides two benefits: It will now be easier for affluent Amazon customers to return items, and, while they’re shopping, pick up more items or lunch. Keep in mind, the reason that buy online, pickup in store is so appealing to retailers is that it lowers shipping costs, and, on average, most consumers spend 25 percent more when they visit the stores.
  3. It gives Amazon a foothold in grocery — albeit high-end grocery — and the opportunity to compete with Walmart and others for high-margin customers through physical locations. Click-and-collect takes on new meaning here.
  4. Data, lots of data, on the most preferred customers is within Amazon’s grasp. Amazon’s algorithms will be able to churn not only the online data, but have insight into what consumers buy in stores. That combination and insight is powerful when further combined with additional data on lifestyle choices. For the most affluent customers, Amazon just leapfrogged the industry in insight.
  5. Private label brands represent another significant advantage. The largest benefit to any retailer is the power of leveraging private label brands. Pretty much everything at Whole Foods is private label and the Amazon Basics brands have been a great win for Amazon. Generally, retailers make twice the margin on private label brands. And when those private labels mean increased quality rather than decreased quality, that is a win-win for profits.
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