[PYMNTS] The Amazon Whole Foods Deal Is Done — Now What?

Skava’s VP of Innovation, Dave Barrowman, sat down in a discussion with PYMNTS CEO Karen Webster, about the recent merger of Amazon and Whole Foods. 

[PYMNTS.com] Just a few short months from the merger announcement, and as of this week, the deal is done: Amazon officially owns Whole Foods.

To celebrate the news, grocery prices at Whole Foods are going down — quite an out of the gate change of direction for a brand that has become as synonymous with its moniker “Whole Paycheck” as it has with the organic and locally grown foods in which it specializes.

“We’re determined to make healthy and organic food affordable for everyone,” said Jeff Wilke, CEO of Amazon Worldwide Consumer, in the press release. “Everybody should be able to eat Whole Foods Market quality. We will lower prices without compromising Whole Foods Market’s long-held commitment to the highest standards.

“To get started, we’re going to lower prices beginning Monday on a selection of best-selling grocery staples, including Whole Trade organic bananas, responsibly farmed salmon, organic large brown eggs, animal welfare-rated 85 percent lean ground beef and more. And this is just the beginning — we will make Amazon Prime the customer rewards program at Whole Foods Market and continuously lower prices as we invent together. There is significant work and opportunity ahead, and we’re thrilled to get started.”

Amazon is thrilled, but investors in almost every other grocery operation in the United States? Not so much. The moment all of that news hit the wires, the grocery industry collective saw $12 billion shaved off its books as investors roundly let out a collective “Eek!” at the scope of Amazon’s ambitions for Whole Foods.

Ambitions that are only the tip of the iceberg, Skava VP and Head of Innovation Dave Barrowman told Karen Webster in this week’s Topic TBD podcast.

“These are not fundamental technical integrations. They are making an immediate and big statement with the prices and opening themselves up to a broader customer and creating a loyalty program with Prime at checkout. I think we are going to see much greater integration with online shopping, subscriptions and things like voice going forward.”

It’s a big opportunity for Amazon — if they can carry it off properly and leverage the Whole Foods brand into their collective assault on commerce — and a massive challenge for everyone else swimming in the retail pool. But, Dave Barrowman said, it’s not an insuperable challenge, only one that will require the legacy players to rethink what they’ve been offering and to whom they’re offering it.

The Amazon/Whole Foods Opportunity

Amazon’s path through Whole Foods is laden with promise, the Skava executive told Webster, but that potential carries a price. The are many ways to go wrong in grocery retail.

“The Whole Foods brand has a specific meaning, and so any perceived reduction in quality could bite them with existing loyal customers. They also run the risk of reducing price at the expense of staff compensation, which could lead to real public relations damage.”

Those outcomes, Barrowman noted, are unlikely, since Amazon has an almost equally fanatical reputation for quality control and “a very profitable cloud computing business that lets them have a less profitable or even loss-leading business segment as they are building market share.”

Amazon’s massive reserve of customer goodwill — with an estimated half of U.S. households signed into the program — is a massive advantage, particularly given how extremely popular the Amazon Prime menu of services is with the company’s customer base.

“You don’t meet a lot of Prime members who are thinking about cancelling. And they now have this new channel to deliver value. Moreover, Prime has historically skewed toward more affluent customers; there is a line of thought that by expanding into Whole Foods and making it more accessible, they are also making Prime more appealing to customers further down the earnings spectrum.”

And, Barrowman pointed out, Whole Foods has an affluent customer base that does put value on exclusivity. Amazon is lowering grocery prices on some goods like eggs, kale and bananas, but is keeping much of the Whole Foods pricing scale intact for a variety of other goods.

“Amazon is going to find that balance … as you can see with the inclusion of the pick-up lockers really working to leverage that physical space to enhance their online eCommerce presence.”

How Does Old School Grocery Compete?

That, Karen Webster noted, is the multibillion dollar question, particularly since Amazon and its seductive pull of Prime have been incredibly disruptive in many other retail verticals. There is a reason $12 billion beat it for the ether as the Amazon deal closed.

“The most important step,” Barrowman told Webster, “is being clear on what their value proposition is and what distinguishes them for their customers.”

That could be a lot of things, and it could be a combination of things. Assortment, pricing, loyalty, location, staff — all things that affect what stores customers want to visit; and what is on the “skip” list.

“Whole Foods is great at the products a customer wants to go in to feel, touch and smell. They are less great in terms of things like cereal, where they may not have all the versions of the matching brand.”

A tempting strategy, Barrowman said, is to double down on selection and try to hit where the Whole Foods/Amazon brand is a bit short.

The problem, he noted, is that a lot of those recurring goods — cereal, toilet paper and the like — are the sorts of things that slot nicely into delivery services, an area where Amazon has already invested a lot of energy.

But even something as simple as improving self-checkout in brick-and-mortar stores can make a massive difference to the consumer experience.

“There is a huge opportunity with the technology. A lot of groceries have done it, and the experience is OK at best.”

Other low-hanging fruit, he said, is in-store size, since smaller-style markets may be better tailored to consumer need.

But, Barrowman noted, the best way to get a feel for consumer need is to find a way to know the customer, which is preferable as they are entering the store, not merely as they are being scanned through checkout.

“When we think about online commerce, they have a pretty good idea of who you are when you enter the site, and that informs what they can show you. I think you are going to see a lot more investment in this because the goal is really personalization and giving the customer a better experience.”

That better experience might be around price or it might be around convenience.  Webster said that parents of small children tend to sing praises for Walmart grocery pick-up because it turns Saturday shopping into a 20-minute experience of loading provisions into the car instead of a two-hour experience that involves a toddler meltdown.

“[They] … want three hours of their lives back, and the challenge for retailers in grocery will be to offer as many modalities as possible. Some people want subscriptions, some people want curbside — and this is what it means to really find a value proposition you can deliver on.”

Extended Commerce

Commerce, Barrowman told Webster, means something very different now — and likely in the future — than it ever has in the past. What was once entirely about people interacting with stores as consumers will increasingly shift to include devices acting on behalf of consumers to interact with merchants.

“We see voice products, responsive AI, devices that know to replenish themselves or at least alert the consumer that the option is available — this is a very quickly evolving area.”

And an area, Webster noted, that is evolving at the consumer’s behest, as the data from PYMNTS’ recent study with Visa demonstrated: Customers want the friction out of commerce and are looking to the IoT to deliver it to them.

And that, Barrowman said, is where merchants need to be ready to jump into the next phase and partner with the coffee machine and washing machines that order for themselves, to put those options in front of consumers when the moment is right for the offer.

“Grocers know their business even if they don’t know tech. They need to think carefully about what it is that makes them unique and valuable to their customer. We bring a very flexible technology platform for them to do commerce on so they can see for themselves how to built into being a bigger part of their customer’s life.”

The goal, he said, is to find ways to make those interactions and touchpoints part of a consumer journey that makes more sense and speaks to need. Instead of just offering a shopping list online, for example, Barrowman expects to see a world with smarter lists that not only let customers log what they need, but that can also make suggestions or at least remember what consumers have already ordered.

The world has gotten tougher as of this week, Barrowman said. Amazon is very good at bringing customers what they want, and Whole Foods is an excellent perch from which to leverage all of those Prime customers into being Amazon grocery buyers as well.

But the race is long, and today’s news is part of the journey toward reinvention that is sweeping grocery retail and is bigger than Amazon alone. Barrowman noted the next 18 months will be particularly worth watching.

And we can’t help but agree with him.

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