Joe Duran

Duran Duranblog

Joe Duran

What we can learn from Amazon's acquisition of Whole Foods

All firms must constantly evolve, find ways to lower costs and deepen relationships with customers

Jul 17, 2017 @ 4:13 pm

By Joe Duran

+ Zoom
(Bloomberg)

For the past 20 years, organic food grocer Whole Foods has rethought the way consumers shop for groceries and brought the farmers' market to neighborhoods all over the country.

While pricey, it succeeded in a crowded sector, and grew in a small niche market into a nationally dominant position, becoming part of the American fabric in the process. In the meantime, shareholders were rewarded handsomely, as the stock grew tenfold from around $4 per share on June 30, 1997, to about $42 per share today.

During the same period, Amazon reimagined the entire consumer experience for all of retail and their stock grew from $2.50 per share 20 years ago to around $1,000 per share today, a staggering 40,000% return over the past two decades (split adjusted).

Last month , Amazon announced the acquisition of Whole Foods for $14 billion. A drop in the bucket compared to Amazon's current $480 billion market cap. While most food retailer stocks swooned as a result, the ripple effects of this transaction will go well beyond that industry.

THE FIRST NATIONAL HYBRID

Amazon has established itself as the nation's dominant retailer without ever having a store. How will they use their size and position to dominate the food market now that they have 460 stores? What lessons are there for firms in other industries?

1. Continue to disrupt or you will be disrupted. Whole Foods was the leader in turning the U.S. into a nation of health-conscious consumers. They also became the champion of the wave of conscious capitalism that firms from Starbucks to Lululemon emulated. However, as competitors like Trader Joe's entered the market, offering healthy choices at lower prices, and supermarkets caught up by redesigning stores and providing more organic products at lower prices, Whole Foods stalled. It was no longer pushing the envelope of innovation that had led it to defend its prices for years. In the meantime, Amazon has constantly reimagined itself and reshaped our perceptions when we think about what business Amazon is in. There is a lesson for all of us that if we don't keep adapting our businesses, our current products and services will ultimately be offered at lower prices by competitors.

2. Firms should use their scale to drive down costs. The larger the firm, the more it can drive down costs by using size to negotiate pricing with vendors. It is in Amazon's DNA to squeeze vendors. Without a doubt, Amazon will pass this onto the Whole Foods consumer. In our industry, the bigger you are the better the terms you can negotiate with investment managers, custodians and technology and systems providers. That means larger firms can deliver the same services to clients with more vendor support at a fraction of the cost of a smaller firm.

3. Use technology to drive efficiency and reduce the cost of delivery of products and services to clients. Whole Foods will benefit from the logistics infrastructure and technological advantage Amazon brings to its operation of 460 stores, getting more out of each storefront. In order to remain competitive, firms have to invest in digitizing the middle office and modernizing their infrastructure to allow staff to constantly become more productive and more effective with their time.

4. Use your established position with clients to deepen the relationship. Both firms have deeply consumer friendly approaches, but Amazon can use its internal analytics and data of individual consumers to deepen the relationship with existing Whole Foods clients and capture more wallet share. The more information you have about your clients, the more valuable you can make the relationship over time.

CONSUMER POWER

The consumer is the big winner. Ultimately, if there is a lesson for every business serving clients it's that you're only as successful as your most recent evolution. Here are the four rules you'd better remember if you want your business to stay relevant:

1. Never stop reinventing yourself.

2. Be on a constant quest to drive down costs.

3. Use technology to elevate the work your staff is doing.

4. Keep deepening your relationships with each of your clients.

Kroger, the nation's largest supermarket chain, fell 15% in the days following the announcement. It hasn't recovered. Other more diversified retailers like Target and Walmart have already felt the pain of being Amazoned (if it's not a verb it should be!). Put the online retailer's principles to work for you so they aren't used against you.

Joe Duran is chief executive of United Capital. Follow him @DuranMoney.

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