It’s nearly two years since the merger between Amazon and whole foods and both companies are reaping the benefits of the successful merger. Before the merger, the Whole Foods was witnessing a decline in sales and the competitors were capturing its market as due to better financial muscle, they were able to offer better or similar quality products at lower prices. Moreover, the major shareholders were also demanding an overhaul of the company structure in order to turn around its fortunes. On the other hand, Amazon has already entered into grocery market since 2008 with the introduction of online grocery delivery service, Amazon Fresh. However, apparently, it needs a brick and mortar store to control its operating costs and increase its efficiency. Apparently, the acquisition benefitted both, Whole Foods and Amazon as the Whole Foods got necessary platform, financing and economy of scales and thus increased sales whereas Amazon is also utilizing Whole Foods to get better value out of the acquisition.
Introduction of the Merged Companies
Whole Foods Market
Whole Foods Market is a brick and mortar chain of stores in the United States that sells fresh and non-GMO Healthy food items free from all kinds of preservatives, taste enhancers, coloring,and chemicals. It was founded in 1978 in Austin, Texas. The company is a highly popular organic food supplier which is now owned by Amazon. However, in 2017, before the merger, the situation was quite different. The company was losing its market share to the competitors and profits were going down as result in line with the revenues.The company offersa comprehensive and distinguished range of high-quality organic and natural products with a major focus on perishable food items. The quality standards of the company ban numerous commonly used ingredients present in the products by the competitors, along with the products grown by companies and people who are unable to track the material used for growing.
The company is selling both private and national brands. Its product section consists of “produce, grocery, meat and poultry, seafood, bakery, prepared foods, coffee and tea, beer and wine, cheese, nutritional supplements, vitamins, body care, pet foods,and household goods.” Its “stores also feature a wide variety of non-GMO, vegan, gluten-free, dairy-free and other special diet foods; and certain stores offer sit-down wine bars and taprooms.” It had 470 stores at the time of filling the 10K statement. (10K statement 2017)
However, just before the merger, the company has expanded as much as possible with its limited resources. The company needs new finance and strategy to support its objectives because competitors were capturing its market share due to a better financial position and cost advantage. Moreover, the institutional shareholders were also demanding strategical and structural change as they were worried about their investment and continuous decline of the sales. It was needed that the company expands rapidly, increasing its sales volume to get the benefit of bulk purchase. So, at a time when the company needs finances, it is difficult for the company to arrange any. As a result, the management decided to merge with some other company and chose Amazon.
Amazon.com is one of the most valued companies in the world and since its introduction, it is doing great in terms of revenue, profitability and brand image. It was founded by Jeff Bezos in 1994. It is included in Fortune500 and is an e-commerce company. It was initially started as an online bookstore. However, due to its popularity, it started selling other products as well and now it sells almost everything. (Overview of Amazon.com’s History and Workplace Culture 2019)
The company is operating retail Web sites, including amazon.com and amazon.ca. It is serving its The company is serving its customers “through its retail Web sites and focuses on selection, price, and convenience. It also offers programs that enable sellers to sell their products on its Web sites and their own branded Web sites. In addition, the company serves developer customers through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable the virtually various type of business.” (About Amazon.com Inc. 2018)
Objectives of mergers
After organic growth for over four decades, the company started faltering. Although the company has reported a healthy profit for the year 2016, its revenues were declining. As a result, the stock price was also going down since 2012 due to which the investors were also worried. “The group generated revenues of $15.7 billion at the end of September 2016, $1 billion in operating cash and had a return on invested capital of 12.7% (Chaboud, 2018)”.
The biggest problem for the company is to attract customers. Due to its failures in attracting and retaining customers, its sales were going down. “The organic grocer had a 7 percent penetration rate back in 2009 when it had some 273 stores. Since then, the chain has been on a breakneck march to open more stores, its fleet now numbering more than 430 locations.” So even the new stores and additional capital investments were also failed to bring in customers and thus sales for the company (Halzack 2017).
Some large competitors emerged which have the better financial muscle to enjoy the economy of scale and hence were able to offer organic food items at lower prices than the Whole Foods. Then, due to its declining revenue and profitability, institutional investors were also pressurizing company for the structural change. It seems that if the company does not address its competitive position and change its strategy to be in a better competitive position, it would keep on losing market share to the competitors who could have dire consequences for the company and the investors. The investors wantthe company to be merged with some large corporation who can give it new direction, strategy,and boost. In such circumstances, the management starts thinking about a merger with some large company having enough financial resources to expand the company rapidly and bringing the economy of scales into play. “Pressure to right the ship heightened in early April when the activist hedge fund Jana Partners announced it had acquired a nearly 9% stake in the company and was angling for a big shake-up in the top ranks.” In such a situation, the company reached Amazon for a merger and Amazon also showed immediate interest due to its own desire and need to have a brick and mortar presence.(Business Insider, 2017)
Amazon. Com is highly successful with its online retailing and distribution. However, the company always felt that it can reduce its distribution and return costs if it has a brick and mortar presence. Amazon entered into the food industry with AmazonFresh in 2008 in the USA. Under this service, the customers can get fruit and vegetable delivered at home for a monthly fee. The company later expanded this service to several other foreign markets. The company wanted to expand its presence in the food industry. The company was extending into the grocery market as well as physical locations, the brick and mortar stores which were most impacted by its own business model. In such a situation, the Wholefoodsprovide a great opportunity for Amazon as it offered one of the strongest names in the yuppie groceries and have a great fleet of stores at the urban locations, that can not only provide required brick and mortar presence to Amazon but also has the potential to double the warehouses for the Amazon. (Thompson 2017)
Although the grocery is a low margin business Amazon has already got huge success in e-commerce which is also a low margin business. Amazon also required a global warehousing solution in order to cater its customers in cost-efficient manner. In this regard, the Whole Foods provide the best opportunity and Amazon was in perfect position to catch this opportunity. So Amazon grabbed it with both hands. Amazon acquired Whole Foods for 14 billion US dollars which is the highest amount it paid for any acquisition. (Thompson 2017)
The acquisition provided Amazon the essential brick and mortar presence necessary to control operational costs, particularly cost of returns. “Whole Foods gave Amazon the brick-and-mortar platform that many internet retailers have begun to realize is essential to minimizing the costs of returns, delivery,and marketing — not that Amazon needs much of the latter (Hirsch 2018)”.
Amazon is also selling its devices through the Whole food stores and the stores are also offering special discounts for the Prime members of Amazon while Whole Foods has started free delivery for the Amazon Prime customers. So both Amazon and Whole Foods have started reaping the benefit of synergies from the merger. However, still, several issues regarding the position and situation of Whole Foods remains to be resolved.
One of the major problems is empty shelves. This is causing frustration among the customers and so they are diverting towards the competitors. The inventory management systems seem to be faulty along with the issue that as Amazon decreased prices in response to the competition, it is failed to provide enough inventory to serve all customers. (Peterson 2018)
Moreover, Amazon needs to use the Whole Foods as a warehouse to store or display other brands as well. Amazon has directly entered into competition with brick and mortar stores and it needs to find out the ways to beat them. Moreover, it also needs to ensure that it expands “Whole Foods” rapidly enough to not only increase the market share of “Whole Foods” but also to reduce its own operational costs.
Conclusion and Recommendations
Whole Foods is a great acquisition for Amazon as it complements the strategy of the company. On the other hand, it is great for Whole Foods as well as it provides necessary financing and scale of operations that give it the economy of scale and helps to attract customers. As a result, the sales of the company have already increased by 19% in the first year. The acquisition is also proving more flexibility to the distribution and delivery of services to Amazon as well. However, there are still some issues which Amazon should address in order to make the acquisition more useful.
There is a problem with the inventory management software as well as the inventory. Many customers have to go back empty hand because of the shortage of products. The company needs to correct the problems with the software. Moreover, the company also needs to ensure its supply lines so that it does not suffer a shortage of items.
The company is also suggested to diversify the product offerings as Whole Foods and add some other hot grocery items. It can also use it as a digital or physical display for other product lines which can be supplied from nearby warehouse to the customer’s place on demand.
Moreover, Amazon is suggested to use all the Whole Food stores as warehouses as well. This would save its costs of returns and also would increase its sales as more and more customers can get quick delivery. This would not only increase sales of Whole Foods but will also result in better place utilization for the same storage size. Moreover, it would also provide a more tangible feel to the conceptual offerings of the Amazon.
10K statement (2017). The Whole Food Company. Retrieved from: https://www.sec.gov/Archives/edgar/data/865436/000086543617000238/wfm10k2017.htm
Overview of Amazon.com’s History and Workplace Culture (2019). thebalancecareers.com. Retrieved from: https://www.thebalancecareers.com/amazon-com-company-research-2071316
About Amazon.com Inc. (2018). annualreports.com, retrieved from:http://www.annualreports.com/Company/amazoncom-inc
Chaboud, I. (2018). With its purchase of Whole Foods, is Amazon’s goal to revolutionise food distribution?. [online] The Conversation. Available at: http://theconversation.com/with-its-purchase-of-whole-foods-is-amazons-goal-to-revolutionise-food-distribution-93161 [Accessed 22 Feb. 2019].
Business Insider. (2017). 7 potential bidders, a call to Amazon, and an ultimatum: How the Whole Foods deal went down. [online] Available at: https://www.businessinsider.com/breaking-it-down-amazon-tough-negotiations-how-the-whole-foods-deal-went-down-2017-12 [Accessed 22 Feb. 2019].
Thompson, (2017). Why Amazon Bought Whole Foods. Retrieved from: https://www.theatlantic.com/business/archive/2017/06/why-amazon-bought-whole-foods/530652/ [Accessed 22 Feb. 2019]
Halzack,S (2017).Whole Foods has a big, basic problem it desperately needs to solve. Wshington Post. Retrieved from: https://www.washingtonpost.com/news/business/wp/2017/04/12/whole-foods-has-a-big-basic-problem-it-desperately-needs-to-solve/?noredirect=on&utm_term=.1c33b114bad2
Peterson, H. (2018). Amazon promises to fix Whole Foods’ crisis of empty shelves. Businessinsider.com. Retrieved from: https://www.businessinsider.com/amazon-promises-to-fix-whole-foods-empty-shelves-2018-2
Pittman Company Budgeted Income Statement