Toronto Star

Amazon buying more than just Whole Foods

Upscale brand comes with vast distributi­on network of warehouses and 460 stores

- DAVID PIERSON AND MAKEDA EASTER LOS ANGELES TIMES

Amazon.com can ship books, furniture and clothing across the Pacific Ocean in what seems like a blink of an eye. But when it comes to delivering fresh groceries to your doorstep, the e-commerce giant’s logistical prowess falters.

That’s because the long journey of, say, an avocado from Mexico gets progressiv­ely harder the closer it gets to the final buyer. It’s more costly and time consuming to deliver individual pieces of fruit to many customers. The hurdle, which has long vexed online retailers and is one of the chief reasons the grocery business is notorious for its low profit margins, is known in the logistics industry as the “last mile.”

By acquiring Whole Foods, Amazon is buying not just an establishe­d, upscale supermarke­t brand, but also a vast distributi­on network of warehouses and more than 460 stores worldwide — replete with back rooms and cold storage — in some of the most affluent ZIP codes in the U.S. That’s a significan­t boost in numbers for the Seattle company, which currently operates fewer than 100 distributi­on centres in the U.S.

More hubs mean quicker and fresher delivery, which will bolster Amazon’s existing grocery delivery service, AmazonFres­h. The service, which is offered to the company’s subscripti­on Prime members for a monthly fee of $14.99, is available only in about 20 U.S. cities. While the bid for Whole Foods may not bridge Amazon’s “last mile,” it certainly brings it closer, experts say.

In the U.S., “this adds 440 refrigerat­ed warehouses within 10 miles of probably 80 per cent of the population,” said Michael Pachter, an analyst for Wedbush Securities. “More importantl­y, it puts refrigerat­ed distributi­on within 10 miles of probably 95 per cent of Prime members.”

It’s a natural progressio­n for Amazon, said Brendan Witcher, a retail analyst at Forrester. The company disrupted retail by offering lower prices. Now it’s focusing on “logistics and fulfilment and the ability to get what you want when you want it,” Witcher said.

To that end, Amazon is encroachin­g on territory long dominated by the likes of UPS, FedEx and the U.S. Postal Service. In the past two years, it has leased 20 Boeing 767 air cargo jets from Atlas Air Worldwide Holdings, won shipping licenses that allows it to pay for containers at wholesale rates and rent them out for more expensive retail rates, and added thousands of long-haul trucks emblazoned with the Amazon logo.

Jeff Bezos, Amazon’s founder and chief executive, said his company wasn’t looking to replace legacy supply-chain companies. Instead, Amazon is adding its own logistics network because it simply can’t have enough — not surprising considerin­g the company was responsibl­e for 43 per cent of all online sales in the U.S. last year.

Analysts say there’s no reason to think Amazon’s deal with Whole Foods will be limited to groceries. The company could one day use Whole Foods locations as a place for customers to drop-off e-commerce returns and make exchanges for items bought online. The stores could also be hubs to pick up nongrocery items, which would reduce delivery costs and provide an alternativ­e for shoppers who don’t want their packages left unattended on their porches.

“Ultimately, we see the deal allowing Amazon to take further share of its customer’s wallet and see a large opportunit­y to leverage many of its technologi­es to grow and optimize the Whole Foods business. We are also highly confident that Amazon will leverage the new store footprint for much more than just selling groceries,” said Daniel Salmon, an analyst for BMO Capital Markets.

“It puts refrigerat­ed distributi­on within 10 miles of probably 95 per cent of Prime members.” MICHAEL PACHTER ANALYST, WEDBUSH SECURITIES

The $13.7-billion (U.S.) deal for Whole Foods could pay off quickly, but it still runs counter to trends in the tech world, in which fixed assets such as real estate and heavy equipment are shunned, said Amit Sharma, a former supply chain executive at Wal-Mart and now CEO of Narvar, a retail app.

“Look at companies in the sharing economy. You don’t need to own assets long term,” Sharma said.

But other experts see advantages to buying Whole Foods beyond just its gourmet and organic food, and access to the affluent customers who favour it.

Groceries can be a lure — one that consumers can’t live without — which could result in more sales of Kindle ebooks and other high-margin goods that could end up on Whole Foods’ shelves.

“You don’t shop for appliances multiple times a week. You don’t shop for any durable goods multiple times a week. But you need to put fresh food on the table,” said Lloyd Greif, a Los Angeles investment banker and president and CEO of Greif & Co. “That’s what drives customer traffic. The more touch points you have with a consumer, the more you’ll be able to sell them everything else.”

 ?? DAVID RYDER/GETTY IMAGES ?? Amazon’s purchase of Whole Foods could be used to bolster its AmazonFres­h service, which delivers groceries in 20 U.S. cities.
DAVID RYDER/GETTY IMAGES Amazon’s purchase of Whole Foods could be used to bolster its AmazonFres­h service, which delivers groceries in 20 U.S. cities.

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