What Amazon Knows that No One Else Does

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Have you read the news? Of course, you've read the news.  Amazon is acquiring Whole Foods in a deal worth $13.4 billion. It's huge - and not just for the price tag. Amazon is finalizing its push into the grocery business and acquiring another income stream into its already bustling enterprise - expanding its brick-and-mortar footprint. 

Here is why that's smart:

The battle between brick-and-mortar stores and their e-commerce brethren has been raging since the advent of online sales, or at least that is the popular sentiment. The reality is that brick-and-mortar stores often are not separate from online sales, but rather an extension of the same business model. "In the third quarter of 2016, e-commerce accounted for 7.7 percent of all retail sales," writes Harvard Business Review. "Many people choose to purchase in stores and pay premiums even though they can order online for less." Amazon must have gotten the memo.

Customer Retention

Take pricing for example. The advent of mobile devices has made it easy for customers to check prices while in-store - many of whom use Amazon for that purpose. In turn, the worry of losing customers to a large online retailer or even to the store's own e-commerce system makes many stores adopt a price-matching strategy that ultimately erodes profit margins unless steps can be taken to encourage additional purchases in-store - and this is the key. While price matching is not a bad strategy per se, especially if it really only applies in 10 to 15 percent of transactions, the onus is on the brick-and-mortar stores to provide additional value in-store to encourage physical shopping. Amazon can help Whole Foods add additional value while Whole Foods helps Amazon bridge the gap into their newest line of business, and deepen their ties with consumers. 

The Rise in Store Closings

Store closings are rapidly becoming a real issue. "On a unit basis, approximately 2,880 store closings were announced YTD, more than twice as many closings as the 1,153 announced during the same period last year," reports Zero Hedge. "By extrapolating the year-to-date announcements… there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings," and could indicate that the current crisis facing brick-and-mortar stores is even worse than the credit crisis of 2008. In the first quarter of 2017, at least 10 retailers declared bankruptcy, including sporting goods company Gander Mountain and clothing chain Limited Stores. For some retail stores, closing its physical stores is the only option to stay open. The Wall Street Journal reports, "Women's apparel chain Bebe Stores, Inc. said it would close its remaining 170 shops and sell only online." But shifting to an e-commerce only plan would not be a solution for many retailers - especially in grocery. Hence, Amazon's bold move (and big acquisition).

Targeting New Customers

Without the value-added benefits of having a physical store - like the ability to, say, assess quality at a Whole Foods in person before making a purchase - those chains are forced to compete on price. That makes them vulnerable to economies of scale and logistics offerings. After all, why not get the lowest price online instead of buying from the online store of a smaller retailer and have to pay more per product, more in shipping and wait longer for your merchandise. Really, it takes both a brick-and-mortar presence and an e-commerce option to survive in today's market - or at least an online presence.

Brick-and-mortar retail stores "have opportunities to improve their assortments, customer service and overall store experience" through online sales, says Dick Seesel, Principal of Retailing in Focus - and many have already started. Programs like Buy Online Pick Up In-Store (BOPIS) and in-store exclusives are proving successful. Nordstrom has seen e-commerce sales rise by over 20 percent and same-store sales are up 2.4 percent after implementing a BOPIS feature that allows customers to pick up orders within an hour of being placed. However, to date, most of these initiatives are in the retail sector - not grocery.

Amazon's push into the sector through a premium chain like Whole Foods is just good business and opens up a myriad of new opportunities for the online retailer. What Amazon is doing is applying retail concepts to selling food. It could be the start of something truly big for the online retailer and a real game changer for the grocery industry as a whole. Amazon may be killing it in the retail world, but only in some very specific sectors. Buying Whole Foods gives them a physical outlet (431 prime locations, to be exact) for real-time customer interaction and information-gathering. In essence, the expansion of the Amazon platform via the purchase of Whole Foods, affords Amazon major clout and makes it a force in the grocer business.