Amazon’s Whole Foods bid is hard to digest
If anti-monopoly laws are not enforced, it will have consequences for everyone else
mazon.com has announced plans to acquire Whole Foods, the high-end grocer. If approved by anti-trust enforcers, the $13.7 billion (Dh50.3 billion) deal would give Amazon control of more than 400 stores, an extensive supply chain and a new source of consumer data.
Amazon will argue to federal authorities, most likely the US Federal Trade Commission, that the deal should be blessed because the combined entity’s share of the American grocery market will be less than 5 per cent. But anti-trust officials would be naive to view this deal as simply about groceries. Buying Whole Foods will enable Amazon to leverage and amplify the extraordinary power it enjoys in online markets and delivery, making an even greater share of commerce part of its fief.
The company has established its level of dominance because of the failings of current antitrust laws. To understand why, you first need to understand the scope of Amazon’s power. It has captured 43 per cent of all internet retail sales in the US, with half of all online shopping searches starting on Amazon. In 2016, it had over $63 billion in revenue from online sales in the US — or more than the next 10 top online retailers combined.
It controls 74 per cent of e-book sales, is the largest seller of clothes online and is set to soon become the biggest apparel retailer in the country.
Amazon today is also one of the world’s largest logistics networks and marketing platforms, as well as the dominant provider of cloud computing, which counts among its clients the Central Intelligence Agency. It manufactures products like the Echo, produces award-winning movies and television series, and delivers food from restaurants in 20 cities.
In building this vast empire, Amazon chased growth over paying dividends, pricing key goods and services below cost to chase out competitors. It invested heavily to buy out innovators like Diapers.com after waging price wars. (Amazon followed its acquisition by raising prices.)
For consumers, so far, Amazon has delivered many benefits. Its Prime programme enables users to receive, through a click, almost any item within two days. But for producers — those who make and create things — Amazon’s dominance poses immense risks.
By integrating across business lines, Amazon now competes with the companies that rely on its platform. This decision to not only host and transport goods but to also directly make and sell them gives rise to a conflict of interest, positioning Amazon to give preferential treatment to itself.
The vast troves of information it collects enable it to self-deal with great finesse. News accounts tell how Amazon exploits data collected on the businesses using its platform to go head-to-head with them.
During negotiations with the publisher Hachette over e-book pricing, Amazon showed its might by effectively disabling sales of thousands of Hachette’s books overnight.
This was not an isolated instance: Reports chronicle how executives tinker with recommendation formulas that determine whether customers see certain goods, turning algorithms on and off as retailers watch sales flow and dry up, Amazon’s hand on the spigot.
Conflicts of interest
Amazon’s purchase of Whole Foods will expand its dominance and heighten conflicts of interest. Prime memberships will enable Amazon to extend its online dominance into physical retail — using stores for pick-up, for example — and to use physical stores to entrench its power online. By bundling services and integrating grocery stores into its logistics network, the company will be able to shut out or disfavour rival grocers and food delivery services.
Amazon was accelerating investment to position itself as a direct competitor in the fresh foods delivery market; this deal would allow Amazon to potentially thwart future innovations. Start-ups will be less likely to enter the field against such an integrated competitor.
Anti-trust laws, which were passed by US Congress to prevent these kinds of concentrations of private power, have been largely reduced to a technical tool to keep prices low. The change in thinking traces back to the Chicago School revolution of the 1970s, which ushered in decades of mergers and consolidation. Embodying this “consumer welfare” regime, Amazon has largely avoided government scrutiny by devoting its business strategy and rhetoric to reducing prices.
Preventing Amazon from concentrating even more control will require that anti-trust enforcers block the company’s bid for Whole Foods. But lawmakers and officials should go even further, embracing the original goals of anti-trust law and adopting a competition policy fit for the digital age. Unless we recover our anti-monopoly tradition, Amazon will centralise exceptional control.
Amazon’s market capitalisation grew by more than $11 billion on the day the Whole Foods deal was announced. Wall Street recognises the reality of Amazon’s market dominance. Anti-trust enforcers should as well.