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The 9 Reasons Why Amazon Buying Whole Foods Is A Good Idea

Adam Hartung profile picture
Adam Hartung

Originally published on June 16, 2017

Amazon (NASDAQ:AMZN) announced it was paying $13.7B to buy Whole Foods (WFM). While not without risks, there are a lot of reasons this is a great idea:

1 - It makes Amazon a national grocery competitor overnight

Building any retail chain takes a long time. Due to the intensity of competition, and low margins, building a grocery chain takes even longer. Amazon would have spent decades trying to create its own chain. Now it won't lose all that time, and it won't give competitors more time to figure out its strategies.

2- Now Amazon can get the necessary "deal dollars" to compete in groceries

Few people realize that no grocer makes money selling groceries. Revenues do not cover the costs of inventory, buildings and labor. On its own, selling groceries loses money. Grocers survive on manufacturer "deal dollars."

Companies like P&G (PG), Nabisco, etc. pay grocers slotting fees to obtain shelf space, they pay premiums for eye level shelves and end caps, they pay new product fees to have grocers stock new items, they pay inventory fees to have grocers keep inventory on shelf and in back, they pay advertising fees to have signs in the stores and products in circulars, and they pay volume rebates for meeting and exceeding volume goals. It is these manufacturer "deal dollars" that cover the losses on the store operations and create a profit for investors.

One reason Whole Foods prices are so high is it stocks less of the mass market goods and thus receives fewer deal dollars. Now Amazon can use Whole Foods to increase its volume in all products and dramatically increase its deal dollar inflow. Something that Amazon sorely missed as a "delivery only" grocer.

3 - Amazon obtains a grocery distribution system


This article was written by

Adam Hartung profile picture
Grab my newest book "Facebook - The Making of a Great Company" on Amazon.com - you'll read in under an hour why you want to own the stock.https://www.amazon.com/s/ref=nb_sb_noss_2?url=search-alias%3Ddigital-text&field-keywords=FAcebook+the+making+of+a+great+companyAdam Hartung has more than 30 years of practical experience developing and implementing successful strategies to take advantage of emerging technologies and new business models. He is currently CEO of Spark Partners, Content Laboratory, Inc. and Soparfilm Energy Corporation. Additionally, Adam Chairs the Audit Committee on the Board of Directors for Six Dimensions Global (SIXD,) and has been on the Board at several privately held companies. Adam provides board advisory services via the National Association of Corporate Directors (NACD) where he is a Fellow and regular speaker on risk management across multiple industries. Adam is the No. 1 Leadership columnist for Forbes.com with over 60million readers, and quarterly Leadership columnist for CIO Magazine. He has been featured in dozens of journals, including Adweek, Washington Times and BBC television. Adam received his MBA from the Harvard Business School with Distinction and continues to travel the globe leading risk management workshops as well as conference and management meeting keynotes.

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