Will Whole Foods Be Amazon’s Waterloo?

Authored by Mark St.Cyr,

Although the Battle of Waterloo means different things to different people, one of the more widely held meanings it’s come to represent is something along the lines of a battle that one side held certain of victory, only to not only be beaten, but then lose everything they had fought for to begin with. This is what ended Napoleon, but it wasn’t for that he had no plan. On the contrary, he just believed his plan wouldn’t fail. That plan was: isolate, and annihilate, each army separately. (e.g., the Allied and Prussian armies.)

If you interchange “armies” for “business sectors”, Amazon’s strategy over the last few years seems much aligned. i.e., War against big-box retail, then all retail, media, spacecraft, and now – retail food shopping. I am of the opinion Amazon™, much like Napoleon, are going to find this battlefield has far more challenges that may end up costing them far more dearly, than they ever bargained for. Here’s why…

Unbeknownst to most, when it comes to the perishable food segment, the regulations and more (i.e., meat, dairy, et cetera) that allow what we American’s take for granted when it comes not only to variety, but for the safety and assured wholesomeness that our food supply is – it’s unlike anything most retailers outside of the industry have ever encountered. Let alone understand.

The ones whom find it the most difficult to acclimate to; are those who are all ready in the retail business (think: department store mentality) and believe it’s all just a case of applying what they know, or what they perceive as “what they know”; and switch it out using a shelf full of, let’s say toys, for a shelf full of steaks, as an example.

Many believe the only difference (an assumed difference) is that one shelf is refrigerated, yet, all the rest is the same. i.e., You have a product, a price, a label, a way to accept money for it, and a place to store back-stock. Sounds easy-peasy right? And that’s the problem, it sounds like it. But it’s anything but in the real world.

The reasons why I know this to be true is because this was the industry I made my marks in. i.e., The meat industry. And when it comes to what Amazon is going to have to contend with going forward I can speak directly to that because (using a hypothetical) when Amazon will be looking to make “deals” or “set up a supplier”, I would be the one on the other-side of the table they would need to negotiate through. And yes, I’ve actually done it, at that level. So I know intimately what I’m talking about, which is why I’m making this case.

This isn’t going to be the first time some retail behemoth decided they were going to get into the “food” market and show the industry a thing or two on how “they” believed the complex should run. It’s been done before, only to have their management sent packing arse-in-hand, shell-shocked, and mumbling for days, “WTF just happened there? Don’t they understand who we are?!” I’m referring to Walmart™ and their initial foray into groceries.

At about the turn of Y2K Walmart entered into the “supermarket” business with gusto. At the time they were gaining quite the reputation for negotiating (more like strong arming or bullying) food suppliers. (think “prepared” like: canned, or boxed product, sodas, etc., etc.) And when they were through – they set their crosshairs on the fresh meat suppliers. (think: steak, chicken, et cetera.) And it was here where they heard what seemed for the first time in response to their: “You’ll do it our way, and at our price, or no way!” demands. That response?

“Take a hike, a don’t let the door hit you on the way out. Oh, and welcome to the meat business.”

The meat industry was the only industry that (at least to my knowledge) sent Walmart reeling with no way for recourse other than to deal on meat industry terms and pricing. In other words Walmart’s “size” or “buying power” wasn’t a dominating factor that could gain leverage for discount. In fact – it could actually work against them, something considered unfathomable to its product buyers. I’ll give you a quick example to help clarify.

If a company wants to purchase 1mm widgets they can find a factory that already has supply with excess inventory if needed (or can ramp up) and negotiate a price. Simple construct for this example. Now: want to buy 1mm pounds of meat?

If there’s some available on the spot market, fine. If not? What are you going to do – make it?

You can – but – that takes well over a year. And here’s the other key – 1mm pounds how often? Daily? Weekly? Monthly? And if you begin buying all the “spot” available? Guess what? Prices may go up for you – and not your competition. For your competition may already be locked into long-term contracts. And what can be even more baffling to the uninformed is this: All your competitors will have it, as in product – and you won’t. Maybe at any price.

Again, it’s a different business. And in the end it took them (Walmart) years with a lot of painful trial and errors as to try to innovate pricing and suppliers for differentiation. Today, if you look at meat prices from their cases comparing to any other (in my opinion) they’re basically right in line with any other national retailer. You don’t see any “WOW!” type price discrepancies unless, it’s a sale item.

The above thumbnail sketch is important, because it will help explain why this, Whole Foods™/Amazon merger might come into resistance not only from the competition, or suppliers. But also – from its existing customer base.

Whole Foods (WF) has garnered the moniker “whole-paycheck” for as long as I can remember, and with good reason. As I stated, being in the food industry for most of my career, when I walk around any supermarket, it’s with a far different eye than most, especially when it comes down to pricing. And WF has never ceased to amaze me.

I am always stunned (again, all my opinion) at the prices being paid by its customers. But there’s a reason for this. And it’s not what most people think. The reason why people pay those exorbitant prices is because of what they deem as some form of “exclusivity” shopping there gives them. e.g., They are showing they can afford it.

Sure, some may say the ambience is better than most other national stores (although I would argue today, that’s far from true) and there’s certainly a different product selection than others. But that’s everywhere. But where the rubber-hits-the-road (i.e., the meat department) all I’ll say too that is: I go “WOW!!!” But not for the reasons WF would like. Which brings me to my point.

WF customers aren’t buying there because of some form of pricing structure that lends itself to discounting. In actuality – it’s the exact opposite.

There are now multiple competitors surrounding many a WF that offer the same type of “wholesomeness” implied by shopping there. One example that’s in my own area is called FreshThyme™ (FT), and I’ll use them to demonstrate my point using a friend of my wife.

Her friend shops WF, but within the last year FT opened here less than 2 miles away from her recently opened WF about a year prior. My wife took her around the store where she purchased similar items as her go-to store. But this time her bill was noticeably cheaper. And I mean much, as in even she was quite surprised. Did she switch? Has she been back there again? Answer: No. And here’s where you begin to understand where I’m going.

Why hasn’t she? Is it because she doesn’t “need” or care to save money? Again, the price differences were not nickel and dimes, but rather, dollars on many items. Was it the “2 miles away” that did it, because we’re all such creature of habit? The answer again is no, because she doesn’t even live in this town, she actually lives some 20 miles outside. But location is the key. And here’s why…

The new WF was built in what is known in my area as “Easton.” It is a very exclusive retailing area. To give you an idea, if you’re walking around the shops and suddenly you have an impulse to buy a Tesla™ after your dinner at Smith & Wollensky™, you can do just that by crossing the walkway. And if you want to celebrate that with some one-of-a-kind key ring? Tiffany™ is right there to accommodate you along with many others. All within a manageable stroll – even if you’re in heels.

Why this is important is this: You are not going to gain market share, or customers, via the discounting model. It just doesn’t work that way to this clientele. And that is an “Achilles heel” to any management team coming from a “race to the bottom” pricing model, which Amazon is. And that leads to the following for consideration.

What advantages does Amazon bring to the WF concept model? Pricing? Management? Logistics? I would argue they aren’t relevant. And actually, the mindset of current senior management at both companies are in for a culture shock that will surely be epic. Imagine the meetings that will be discussed (as in shouting matches) on why reducing prices doesn’t work, or not spending money for a key display in an effort to cut costs, not understanding (or listening to reasoning) that reducing the display purely for “cost” might reduce actual sales.

I’ve seen it happen, and I know how they turn out. All I’ll say is this: not good.

Walmart was a different animal, for they already had brick and mortar stores – adding on a grocery store to existing models was (for lack of a better term) a natural fit. But it has been anything but the slam dunk many first envisioned. Especially Walmart itself.

WF is different, for it is a stand alone market. It has to fight to get (let alone retain) every customer into its store for a specific purchase. There’s no “We’ve got TV’s, and furnishings over here, toys over there. Oh, and now you can shop for groceries also!” e.g., There is no other reason to go to WF than to buy at WF. And they don’t go there because it’s cheaper than the competition, far from it.

If the culture of Amazon doesn’t mesh properly with the now management of WF the resulting missteps that may send customers once loyal elsewhere to shop alternatives (and they’re everywhere) could unfold faster than a next day delivery. And if you’re looking for further clues of where such missteps can happen, look no further than what is currently unfolding at the Washington Post™.

Again, this is the type of “culture shock” that typically takes place when an “outsider” comes in, and its management team (along with style) tries to impose what it now deems as “policy” going forward. More often that not the backlash that result over time begins to cripple the management of both. This WF deal could add to that already mixing cauldron.

Maybe the best indication of where this might all be going comes from none other than what is surely this whole war’s leading general. e.g., Rodney McMullen, CEO of Krogers™. To wit:

“Whole Foods is a ‘good fit’ for Amazon.”

I believe Wellington said something similar as he watched Napoleon deploy his troops. But that’s pure speculation.

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