Whole Foods Market Acquisition by Amazon

Modified: 21st Dec 2021
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Introduction

Whole Foods Market is a supermarket chain established in Austin, Texas, in 1980. It has expanded rapidly into 497 stores mainly in the U.S with a few locations in Canada and England. Whole Foods Market differentiates itself as a supermarket with selective, high quality, and organic products by offering a broader range of services at higher prices. Its target customers are upper-middle-class people who appreciate the value of natural foods and are conscientious about the environment. Historically, Whole Foods Market has attained organizational growth and geographic expansion through mergers and acquisitions of other grocery stores. The reason for researching Whole Foods Market is because it has been acquired by Amazon.

Based on the Whole Foods Markets website, the core values are the following:

"Satisfying and Delighting Our Customers and Supporting Team Member Happiness and Excellence." It has created a strategy that fits with the popular consumer trend towards "living green" and the increasing popularity for consuming local, sustainable products, which has enabled the supermarket's growth. However, there are some challenges that come with the competitive nature of the retail industry as organic and natural food have become more common and less pricey with more suppliers. Just a few months before the acquisition by Amazon, Whole Foods was pressed by restless investors and therefore changed its CFO, along with the other 5 directors, to improve operations and cut costs. In the words of The New York Times​ ​, Whole Foods was "facing the greatest crisis of confidence in its 37-year history" (Tsang, 2017). Thus, did the acquisition help Whole Foods' situation?

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SWOT Analysis

The most prominent strengths of Whole Foods Market is the high quality of products, customer satisfaction, passionate staff, and promotional blogs, which build a strong brand image for the company. Such a brand image allows Whole Foods to differentiate itself from its competitors as well as attract a larger consumer base. In contrast, some of the key weaknesses of Whole Foods Market include weak international operations, lack of advertisement, and high risk for market uncertainty as the company relies on local markets to supply organic products. Moreover, the pricing is viewed as a luxury shopping destination focused on high quality and higher cost products, which may be a risk factor when consumers are price-sensitive.

Importantly, there are many opportunities at Whole Foods Market. It had the ability to sponsor more town events to expand their network, increase brand name through corporate social responsibility, and take advantage of the natural food trend to promote to customers to be more health-conscious. In addition, it is also possible to try to reduce the competition's presence by opening new stores, focusing on expanding the prepared foods industry and utilizing organic perishables into drinks to create higher profit margins.

It is also important to be aware of the threats and intense competition in the industry. Major competitors, such as Walmart and Kroger, have increased their investment in technology and delivery to gain advantage and brand recognition over Whole Foods with more stores in rural areas. Market saturation is also a big threat as there is a limited amount of neighborhoods with the socio-economic status to afford the price levels Whole Foods offers and the desire to buy directly from the producers. Changes in government regulations and new policies on organic food would impact the company even further.

Issue/Problem

In 2017, Amazon acquired Whole Foods for $13.7 billion. Known for its innovative products and efficient deliveries, Amazon's espoused value is "to be Earth's most customer-centric company" (Hanlon, 2018). Although Amazon's mission somewhat connects with Whole Foods' mission in providing customers with high-quality organic produce and products, their company culture and strategies clash with Whole Foods'. According to a Harvard Business School study, "Amazon's acquisition of Whole Foods was the corporate equivalent of mixing tap water with organic extra virgin olive oil. You'd be hard-pressed to find two companies with more different value propositions" (Blanding, 2018). Clearly, there is a conflict between Amazon's data-driven, cut-throat company culture and Whole Foods' open-minded culture.

Testable hypothesis

The acquisition of and change in the Whole Foods Market has damaged its brand identity, operational performance, customer service, employee satisfaction, and competitive position in the industry. Since food is essential to human life, it is important to analyze the reasons and consequences for the clash between Amazon's business model, strategy, and culture with Whole Foods Market's mission and values. Moreover, it is crucial for Whole Foods to retain its unique mission while trying to align with Amazon's new expectations for the company. We will use different concepts to discover the potential of the company and the difficulties the grocery market industry encounters in hopes of finding the best approach to achieving greater organizational effectiveness.

Analysis of the Issue/Problem

Research has shown that the clash in Amazon's organization structure has damaged Whole Foods' brand performance. One of the biggest differences since the acquisition is that Amazon is imposing its centralized operations onto Whole Foods. Previously, Whole Foods was a more collaborative environment with a flat hierarchical structure with decentralized leadership and decision-making. Their organizational structure relied on employee empowerment and harmony of the store teams to manage and provide a personal retail service experience to better satisfy customer needs. However, decisions for Whole Foods are now based in their headquarters in Texas with more formalized processes.

Another apparent clash between the two companies is in the different strategies each company has wanted to pursue. Now, the structure of Whole Foods Market has changed to inform the new strategy. After the acquisition, Amazon offered a large percentage of Prime discounts across select products and charged it back to the vendor. With the new standardized system, they have stopped engaging with the neighborhood to find the best local products and other community events. This inherently contradicts Whole Foods' value of focusing on building good relationships with suppliers since they previously "[supported] and [promoted] local products and suppliers" by having local producers demo their product and interact with the customer experience in stores. Additionally, Whole Foods has previously positioned itself to reduce the bargaining power of suppliers to a minimum because of its diverse supplier dynamic.

Moreover, Whole Foods was forced to cut down prices on various products significantly such as avocados, eggs, fruit, fish and prepared food. Though the store-wide price cut may have looked appealing at first sight, a company like Amazon, which is so profit-driven, is not going to cut profits to primarily provide free benefits for customers. Moreover, Whole Foods was originally perceived as a socially conscious corporation, but now analysts have reported seeing more displays of generic products (Peterson, 2017). Additionally, shoppers have complained that​ stores are filled with damaged and rotten produce following the acquisition by Amazon.

Though Whole Foods initially prided itself on its customer service, the level of customer satisfaction has suffered greatly in this transition. The variety of services they provided was also diminished when Amazon forced people to order online by stopping Whole Foods' home delivery for in-store shoppers in New York City. Customers have not been able to adjust to ordering online, have complained about the inconvenience of stopping this service, and are forced to shop in-store and carry their purchases home by hand. This is inherently caused by the evident misalignment between Amazon's data-driven culture and Whole Foods Market's customer-driven culture. Whole Foods can no longer focus on a personal touch with customers or the empowerment of individual employees, and at the same time, they are unable to emphasize high quality, healthy, and local foods as they are now forced to focus on cost savings.

Many other clashes have made a large impact on employee satisfaction. As Amazon intensely focuses on profitability, it has been difficult for Whole Foods team members to adjust to the new fast pace and constant technological monitoring of work. Under Amazon's latest policy, Whole Foods employees are required to use "scorecards" to comply with the new inventory-management system called order-to-shelf, or OTS. Though these procedures started with Amazon's goal to increase cost efficiency, it has instead led to food running out, a stressful working environment, time-consuming paperwork, and understaffed stores (Peterson, 2018). The decreased time available for customer service has resulted in less energy going toward improvement or innovation and much lower employee job satisfaction.

In addition, to achieve company goals, employees have lost their autonomy to grow and improve. Instead, they have to choose whether they want to give up their work-life balance in order to gain a head start over their co-workers (Kantor & Streitfeld, 2015). With Amazon's reputation as a hypercompetitive company, Whole Foods is no longer a happy place at which to work nor can it transfer a positive emotional experience to customers as easily. Whole Foods even reduced part-time workers' medical benefits for cost reduction, which contradicts their originally espoused value of protecting employees (Peterson, 2019). Most of all, since being bought by Amazon, employees at Whole Foods report that their working conditions have declined due to the pressure to push Amazon Prime deals and memberships.

On what does the hypothesis depend?

The damage of Whole Foods Market imposed by Amazon is more evident in customers where recent changes have caused high levels of suspicion that there is a reduced quality in products. Thus, the bargaining power of buyers is a dangerous force when customers lack loyalty in the brand, especially when the threat of substitutes is very high. During times of economic downturn, consumers become more price-sensitive and can easily purchase from a different store if they realize that Whole Foods' competitors offer undifferentiated, organic products with the same approximate level of quality.

Competitive rivalry has also intensified the testable hypothesis as there are numerous big grocery chains like Krogers, Trader Joes, Costco, and other international grocers all selling similar products and eagerly expanding their market share in the United States. The fixed costs of Whole Foods are considerably high as perishable products are time-sensitive and could lead to severe damage when it comes to price competition. Whole Foods will have to be aware of potential new entrants in the industry as Walmart has recently started to increase their organic selection and has the resources that come with being a massive retailer capable of lowering prices. At the moment, consumer's switching costs in the grocery industry are considerably low with many natural product companies serving similar customer needs.

How could the hypothesis be challenged?

One challenge for the hypothesis that Amazon's acquisition has damaged Whole Foods'​ brand identity is that prior to the acquisition, Whole Foods' own branding, which has represented specialized, regional, and organic products, was not a profitable business model. According to an analysis of Amazon's acquisition of Whole Foods Market by CNBC, "In 2017, before its sale to Amazon, same-store sales were declining 1.5 percent, according to regulatory filings. The previous year, they were declining 2.5 percent" (Hirsch, 2018). Whole Foods was stuck between offering shelf space to small brands and new products in order to maintain its own brand identity versus a more centralized approach (simplifying operations by creating a centralized filter/channel rather than traveling from region to region to meet individual suppliers) where small brands get pushed out of the competition in favor of profitability. Whole Foods' hierarchical system was complex, as small brands were able to enter and exist at Whole Foods through regional representatives, and each region had a variety of exclusive brands, which was difficult to manage.

After Amazon's acquisition, however, they have been able to obtain data on how customers shop online and offline by analyzing Amazon Prime shopping and Whole Foods shopping in-store. Through their new strategy, Whole Foods has been able to distinguish the profitable small brands from the unprofitable small brands and promote the most profitable customer segments. Thus, Whole Foods can continue to maintain its image of being supportive of local brands and new products, as well as gain profit from its branding strategy. A refined testable hypothesis could be stated as follows: Amazon's centralization of Whole Foods' branding strategy is damaging to small and new brands relative to the degree of these local brands' initial successes and popularity based on their designated region of distribution.

One other challenge to the hypothesis that Amazon's acquisition damaged Whole Foods' customer service is that after the acquisition, Amazon was able to bring back customers who had not been to Whole Foods in a while. According to SMG's market intelligence tool BrandGeek, which collected behavioral data linked to customer feedback in the first year since Amazon's acquisition of Whole Foods,

Almost half [49%] of the people whose last visit to Whole Foods was 6–8 months before the acquisition have returned since [...] The lapsed customer group includes a majority of younger shoppers with lower incomes. The acquisition appears to be drawing in more of this demographic, with a 3.2-ppt increase among Gen Z-ers and a 1.2-ppt increase with millennials. In addition, customers with an income of less than $40,000 have increased their visits to Whole Foods by 2.7 ppts [...] In addition, customer experience scores with​ loyal Whole Foods customers are down after the acquisition. With a 3-ppt decrease in Speed/Ease of Checkout, a 4-ppt dip in Availability of Merchandise, and a 2-ppt decrease in Overall Satisfaction, it's apparent Whole Foods is having trouble keeping up with the standards of its loyal customers. (Sellers, 2018)

Immediately after the acquisition, Amazon cut prices and diversity of products, which explains the customer dissatisfaction within the loyalist group who values the price premium of products labeled as "specialized," "local," or "organic," as well as brand diversity, availability, and quality. However, with more customers coming in from lower-income classes and younger generations, waiting lines are longer, and shelves empty faster, hence inconveniencing the loyalists who tend to enjoy a traditional shopping experience.

The newly attracted customers, however, use technology such as online grocery shopping, as well as Amazon Prime, to their advantage, creating a new customer segment for Whole Foods to target. They are lower-income, price-sensitive, young, and loyal to Amazon. They are more aware of the perks of Amazon Prime technology, such as sale items, exclusive deals, and same-day delivery of fresh groceries on their doorstep. Another refined testable hypothesis could be stated as follows: Amazon's acquisition of Whole Foods damaged Whole Foods' reputation with loyal customers who tend to be higher-income individuals who visited monthly or bimonthly in exchange for attracting lapsed customers who tend to be young, price-sensitive, and loyal to Amazon membership.

Recommendations and Conclusion

The root cause of the damage to Whole Foods Market is essentially the misalignment of the two inherently different companies. There is no perfect company framework, strategy, or culture because the key is that all the components, such as inputs, strategy, and outputs, must match and fit with each other. Thus, Whole Foods Market should reevaluate the new environment and resources they encounter after Amazon's acquisition and find a middle ground for it to reconcile their history to attain future improvements. One piece of advice is for Whole Foods Market to utilize the advantage of social media to enhance their brand awareness and interact with current and future customers. A way to implement this is to sell the importance of their brand as being the best provider of healthy food and use the scarcity principle to highlight the unique benefits of organic produce. They can also establish some sort of loyalty club for rewards or discounts to help more consumers reinforce the value of paying extra costs for natural food. If Whole Foods Market can maintain its good relationship with suppliers and continue to offer a variety of organic products, their brand image and recognition will remain quite strong. Whole Foods Market has to maintain trust in its ability to offer high-quality products to lure loyal customers back in. As well, they must continue their commitment to employees, consumers, and local producers.

"structured empowerment, where a company standardizes operations but allows flexibility for employees to make their own choices in key areas where having high-touch contact with customers matters."

APA Style References

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