When Amazon announced its intent to purchase the Whole Foods supermarket chain for $13.7 billion (cash), the shockwaves reverberated throughout the world of retail. But no sector of the economy was shaken harder than the e-commerce industry. Which begs the analogy: we are witnessing the “colonization” of the Internet.
For three centuries, up until the mid-1900s, the European powers divided up the continents, planted flags and claimed sovereign territories. Today, the big tech companies are doing the same thing with the world of Internet commerce. We’re witnessing the formation of category monopolies, and every corner of the e-commerce landscape is being zoned for development: sales, streaming media, advertising, hardware and software. Soon, there’ll be nothing left to claim.
Facebook and Google have seized dual ownership of digital advertising, claiming 65 percent of all Internet ad revenue (and 90 percent of new category growth). PayPal is synonymous with online payments, processing $278 billion annually. Spotify is the premier player in music streaming, with 43 million subscribers; Netflix dominates streaming for film and television. Apple is waging a war of attrition with Samsung over mobile devices, and Microsoft is striving to retain its supremacy in business software.
But the biggest turf war of all is over online shopping–namely, the race to become the go-to portal for everyday household goods, foods and essentials. It’s a colossal battle between billion-dollar corporations–Walmart versus Amazon–and to the victor go the spoils. Walmart has a big edge in brick-and-mortar locations. Amazon reigns supreme in online sales. Now, Amazon’s pending acquisition of Whole Foods puts them in the brick-and-mortar marketplace, providing an instant network of distribution centers and gaining a trusted brand relationship with high-end shoppers.
Retail experts speculate that Amazon will use Whole Foods to launch a faster, more versatile system of home delivery for groceries. Significant changes are also anticipated for the in-store shopping experience, with the adoption of innovations including the “Amazon Go” purchasing technology and digital pre-orders.
It is telling that Walmart, the country’s largest retailer with more than 340 billion in annual revenues– more than three times that of Amazon–is feeling the pressure of shifting consumer behavior.
The “Amazon effect” and the consumer migration to e-commerce has Walmart moving aggressively into the Internet marketplace. In May, the company reported that online sales in the U.S. had jumped 63 percent in the first quarter of 2017. Part of that surge was likely the result of discounts Walmart offered in April on 10,000 items, if customers purchased them online and picked them up in-store.
While Walmart is trying to leverage their credibility as America’s low-price leader to expand their online presence, Amazon is doing the opposite, leveraging their reputation for cyber-efficiency to capture traditional household sales revenue. Walmart will double-down on special deals and Internet-only bargains, and Amazon will accentuate the ease, quality and convenience of the Whole Foods shopping experience. Both companies will cut prices and squeeze margins–at least for now–in their bid for share of the $600 billion U.S. grocery market.
From a distance, the Amazon-Whole Foods mash-up does not necessarily look like an extinction-level event. At present, Whole Foods owns just 1.7 percent of the U.S. grocery market. Amazon owns less than one percent. Compare that to Wal-Mart’s 18 percent market share. And yet, some analysts are proclaiming that the move marks the end times for the traditional grocery model. Such is the power of the technology and innovation advantage for which Amazon and Jeff Bezos are known.
What is certain is that Amazon’s acquisition of Whole Foods is a harbinger of a new wave of consolidations and acquisitions focused on e-commerce as a primary component of the customer experience. With Whole Foods, the challenge for Amazon will be to resist cutting costs to the point where small farmers and artisanal food producers are no longer able to slice further into reduced margins. Food packers and provisioners may start to cut corners. The technology edge that Amazon is likely to implement may alter the nuanced appeal of the Whole Foods experience.
For online shoppers, there will certainly be new opportunities–at least for a while. With multiple interests fighting over category share, price competition will benefit the buyer. Amazon and Walmart want to “train” consumers to visit their sites–and only their site–for their everyday household needs, and they’re willing to underwrite this training with irresistible bargains. But once the competition ends and these monopolies are consolidated, the deals are done. These discounts are strategic, and they’re not going to be permanent.
Large corporations will spend whatever it takes to protect their digital turf. Perhaps the best news is that this represents an extraordinary opportunity for small and mid-size business owners. The e-commerce giants are growing as much through acquisition as they are through in-house innovation. If you own a dot-com company that could give a big player a competitive advantage, they’ll buy you out. You could become billionaire overnight. Then you can buy your organic tofu anywhere you please.