On Friday, Amazon purchased upscale grocery and health food chain Whole Foods for $13.4 billion. Business outlets have praised the deal for both sides by noting that Amazon gains the brick-and-mortar presence that it has long sought while Whole Foods gains a major bump in stagnant stock prices. Squeezed by Costco, Target and Walmart’s increasing forays into the organic produce, Whole Foods was forced on the defensive in recent years, making shareholders unhappy.
Now, with the sale to Amazon, Whole Foods gains a second life as part of the world’s largest internet e-commerce company. Already, speculation has begun regarding how Amazon can leverage its technology to streamline Whole Foods’ operations and how Amazon can leverage the massive network of 460 stores in the US, Canada and UK to extend its relatively recent profitable streak.
But what do these obvious business benefits mean for American consumers?
While it will take time to know for sure, it’s probable that Amazon will add Whole Foods products to its AmazonFresh service, available to Amazon Prime members for an additional $14.99 a month. Competition in the American online grocery delivery service space has been unexpectedly fierce in recent years with companies such as FreshDirect and Instacart holding their own against Amazon and likely slowing AmazonFresh’s expansion into additional cities.
By adding Whole Foods products, Amazon will likely be able to entice more consumers into trying AmazonFresh. Both AmazonFresh and Whole Foods already target a traditionally overlapping customer base of affluent professionals so merging the ease-of-use of Amazon’s platform and logistics with Whole Foods robust brand penetration and food supply chain represents a real chance at achieving the retail ideal – a flexible grocery service with similar products both online and in-store.
But there’s one potential issue with such a strategy – pricing. In recent years, Whole Foods’ growth has stalled due to competition but also saturation among affluent consumers. Colloquially known as “Whole Paycheck”, it’s easy to see why when the grocery giant charges nearly double items like the popular New York bodega staple, a chopped cheese sandwich.
That is why it pivoted last year to attract lower-income consumers – to the delight of financial analysts. Evidence of this strategy can be seen most prominently at the corner of 125th Street and Lenox Avenue in Central Harlem where construction on a new Whole Foods is nearly complete in a traditionally underprivileged area.
But the problem with Whole Foods’ brick-and-mortar approach is that it relies too heavily on the forces of gentrification. Because Whole Foods is perceived to be a premium brand, housing prices around their locations tend to skyrocket. This Whole Foods effect means two things – (1) that Whole Foods never really expands its reach beyond residents who can afford the now inflated rents and (2) that Whole Foods never has the incentive to lower prices.
More brick-and-mortar locations and expanded delivery services will do little to help AmazonFresh and Whole Foods expand its customer base if its pricing isn’t brought back down to earth. With its purchase, Amazon has the opportunity to leverage efficiencies to bring prices down prices on groceries for both services.
Not only will this be good for the business by bringing in more customers, it’s good for America. Cities such as New Orleans, Chicago, Atlanta and Memphis have huge problems with food deserts – areas where communities have little to no access to healthy food such as vegetables, meats and dairy products. Approximately 2.3 million people live in low-income areas which are further than one mile from a supermarket with no access to a vehicle and such limited access to fresh food disproportionately affects African-Americans.
This prevalence of food deserts has a direct effect on Americans’ health. Living in a food desert forces people to fill in gaps in their diet with fast food. This spikes rates of obesity and diabetes in these communities – precisely the ones that can least afford to deal with the consequences given the current and potential state of American healthcare.
While not the entire answer to America’s distribution of healthy food, Amazon has the unique opportunity to provide more communities with access– either in-store or online. No retailer, even Walmart, has had such an opportunity to bring necessary goods directly to people before. While consumers shouldn’t begrudge Amazon for making a profit, this profit will also hopefully mean that more Americans get to enjoy readily available, and accessible, grocery options in their neighborhoods rather than just gentrification.
Jason Chung is currently senior researcher and attorney at NYU SPS Sports and Society, in New York. He tweets at @ChungSports
Categories: Uncategorized
Exactly Jason. Many times the government forgets that in the long run it will be costly for society to have a population that is not able to afford healthy food, and definitely some measures should be taken.
And Whole Foods should also start assuming their responsibility towards society… Let’s see how it goes with Amazon.
I note that different chains don’t provide exactly the same foods in each location. Demand and the ability to pay are important aspects of what is sold. Every store can sell the highest quality of food in every location so your question of access shouldn’t be the primary question unless you are talking about safe access. Barry already explained that so the next step to consider is how does one alter demand and ability to pay?
Demand and ability to pay have to some extent been helped by President Trump with higher employment, higher salaries and a push towards a more favorable atmosphere towards the police that keep commercial areas safe helping permit prices to fall.
Absolutely agreed, Barry. As my article suggests access should be more widely viewed as cost+accessibility. It’s pointless to bring people to fresh goods they can’t afford. It’d be great for Amazon to apply its massive economies of scale and logisitics to drive down WF prices AND to bring such goods to more communities in the US.
Regarding the low cost of junk food on a per calorie basis, it’s a costly travesty. If the government was serious about preventive care, it would really subsidize healthy food distribution in poorer communities and ban the worst junk food offenders like HFCS either directly or through the elimination of subsidies for corn used for HFCS.
The bigger problem with healthy food for low income people isn’t access. It’s cost. I’ve read that on a per calorie basis, healthy food is 12 times more expensive than unhealthy or so-called junk food. When you’re on SNAP benefits (food stamps), that’s a problem even if there were access to healthy food on every street corner.
The Whole Foods business model appeals mainly to upper middle class people who can afford its offerings. Moreover, as more people who can afford the cost embraced healthy eating, especially organic food, the traditional supermarket chains started to pay attention and increase their own participation. Whole Foods once though it could eventually operate 1,200 stores in the U.S. as compared to its current base of 460. I think they grossly underestimated the competition and may well have overestimated the market as well.
As for low income people, it would be hugely expensive to subsidize healthy food to get it to the point where it’s anywhere close to competitive with unhealthy food on a per calorie basis.
Agreed. Competition is a great thing and should be encouraged in this space.
That being said, I’m hopeful that Amazon recognizes their business and moral opportunity to bring good food to traditionally underserved communities. If they succeed, it may demonstrate to others that being virtuous in terms of food can also be a great business plan.
Good points, John. Certainly, I’m a fan of progress so I don’t begrudge revitalized neighborhoods.
In terms of urban planning, a greater equilibrium between the historical residents and incoming ones is likely the answer. Instead of a Starbucks on every corner, consistent patronage of a good local cafe or watering hole would be ideal. It’s about remaking the neighborhood to be better, not a reflection of an image. This approach would hopefully also keep rents affordable for longer as large companies wouldn’t price out competitors for prime shopping areas thereby bringing up area prices generally.
As for Whole Foods, I suspect they have plenty of wiggle room to play with pricing on existing goods rather than being forced to offer lower-priced alternatives. They play up the organic angle to mark up items to sometimes unreasonable rates – not even factoring in the fact that they got caught overstating weights on prepackaged items.
In the end, I think Whole Foods can be more efficient about the neighborhoods where they do pack their more expensive, price-insensitive items. That would allow them to carry less of them and maybe cut down on waste and overhead and bring that savings onto consumers.
Of course, having a true competitor pushing them would help – maybe Trader Joe’s can buy Instacart?
We shouldn’t cheer too loud when any merger or acquistion occurs that brings beneficence in lower prices or improved access. These can be temporary goodies. Sooner or later, if firms become large enough, they begin to affect prices. This is called market power and is a defining feature of monopolies. One can count on monopolies affecting prices when economic times are slumping. Its much better to have many buyers and many sellers and smaller firms in general, all of whom take prices, rather than make prices. WF fulfills no natural monopoly need, as a utility might, so to be sanguine about its acquisition is a little shortsighted. …but, who knows, the new firm may be virtuous.
Man, you certainly know your stuff here
I get it. I agree with you, but ..
I’m not sure how you make the Whole Foods model work while offering the more affordable options you describe. If you open up your inventory and offer lower priced alternatives, I am guessing people stop buying the more expensive items and your system stops working
Maybe you have ideas. I’d love to hear them.
The other thing?
I happened to be reading this comment while standing outside of a Whole Foods in downtown Los Angeles and it struck me.
Gentrification?
Gentrification is a weird word. It’s easy to throw it around. I’m not saying you are, but a lot of people do.
Whole Foods has anchored redevelopment in many deteriorating downtown areas.
It’s easy to forget what cities across the country were like before Whole Foods, Starbucks, Trader Joes and the businesses that followed them …
They were dying, businesses were boarded up, the streets were crime and drug infested
Does the gentrification you warn against benefit one group more than others? I’m not sure I know the answer. But if I live in a less affluent community in the proximity of a downtown area that is coming back to life, I think my chances are probably getting better
Thanks, Jim. Appreciate your thoughts.
For what it’s worth, I also hope that Whole Foods’ corporate culture in terms of being a good place to work and customer satisfaction doesn’t change too much. Especially in light of the fact that Amazon is notoriously viewed as an awful place to work. But pricing more aggressively doesn’t necessarily preclude paying for nice humans because WF has lots of headroom to gain more customers and offset lower margins through increased sales.
Trader Joe’s and, to an extent, Costco are examples of how targeting the middle-class through efficient service and good products leads to strong revenues. In fact, there was nothing wrong with WF’s strategy and their roll-out of supposedly lower-end 365 stores – except for the fact that 365 couldn’t be as efficient as possible because they didn’t want to cannibalize WF sales.
They actually had it backwards. What’s necessary is for the whole company to move to better pricing to help the masses and their own bottom line. And then WF could roll out “premium” shops in zip codes that can handle it (or online generally) with higher end niche products.
Very interesting Jason. When I first saw the title, I thought: “Oh Gawd, here we go again in our never-ending drive to the lowest common denominator.” I’ve always sort of liked a high end food store populated with really nice people (take that however you’d like). But your article was very thoughtful, and made good sense. It IS important to make it easier for people of lower economic means to find alternatives to junk food. It’s interesting when you read the grocery store ads in newspapers: lots of junk food followed by antacids. In any event, good work.