Q: Amazon has spent years undermining brick-and-mortar stores. Suddenly it’s going in the opposite direction and building bookstores—including one in Dedham, Massachusetts. And now it wants to buy hundreds of grocery stores. It doesn’t make sense.
KH: In the retail sector, grocery typically has a very low margin. So to acquire Whole Foods would seem to dilute Amazon's profits. But Whole Foods actually has one of the highest margins in the grocery industry, as well as a great following among consumers.
Q: So, in other words, if you’re going to get into groceries, Whole Foods is a good way to do it. But Amazon is an online company. How does having retail locations help them?
KH: I think the acquisition is mostly a way for Amazon to leverage its ability in consumer analytics and logistics operations. Amazon could potentially observe and track the movement of consumers within the Whole Foods retail space and see how they’re picking up produce, buying the produce, or putting it back. It’s just like Netflix observing our watching patterns with streaming videos.
Q: Amazon has already started doing some of that with Amazon Go, a store that has no cashiers. It simply tracks products as you put them in your cart and charges you on the way out of the store.
KH: Yes, the Amazon Go video suggests that Amazon could leverage its analytical ability to track consumer's purchasing behavior as well as the foot traffic in Whole Food's retail space.
Q: So using its big data expertise, Amazon might be the first grocer to make online grocery shopping a truly successful part of its business.
KH: If Amazon could further improve the data analytics so that it can better forecast what needs to be stocked, that could give it the ability to forecast what products will sell and could potentially improve the profit margin even more.
Q: What’s the endgame for Amazon?
KH: Potentially these physical locations could open up different types of business opportunities for Amazon. Remember, the Amazon bookstores, more than just selling books, are also a showcase for Amazon devices like Amazon Echo, Fire TV, and so on. So consumers could go to Whole Foods stores and actually touch and test an Amazon device. Or even pick up something they’ve ordered online from Amazon. In a way, the Amazon bookstore and potentially the future of Whole Foods grocery stores could be looked at as a way to lure customers into Amazon's entire retail ecosystem.