There’s always a fine line between creative disruption and creative destruction. Such is the beastly nature of capitalism.
Amazon.com Inc.’s nearly $14 billion bid for Whole Foods is about more than just acquiring a means to sell high-end food products online. It’s about busting the supply chain in an ancient business.
I have no direct knowledge pipeline into Amazon’s strategy for acquiring Whole Foods, which is known for overpriced, organic products. But it’s clear that they want to re-invent the grocery business and create a new business model. There are several positive and negative scenarios.
Jeff Bezos, chief executive officer of Amazon.com. (Photo by Drew Angerer/Getty Images)
As with any stock, Keynes’s “animal spirits” often govern the pricing of a company. The market expects Amazon to dominate all of retail, which is why it’s priced at nearly $1,000 a share. The company may even score big in food distribution and retail.
To understand why Amazon wants to be a major player in the grocery business, you have to look at the system behind the industry. It’s complicated, but Amazon may tear it down to eliminate middlemen. That’s how it built its retail empire, which is threatening every shopping mall, independent store and old-style department store chain.
Here are five observations on how this merger may reshape the grocery business:
— Re-invent Distribution. As it stands now, the traditional model of the grocery business is an interlocking system of distribution networks. Wholesalers specialize in certain products: Fish, meat, etc. Major vendors, which pay top-dollar for eye-level shelf space, go right into major chain stores and restock shelves.
Amazon, with its massive regional distribution centers that are often larger than shopping malls, could cut out most wholesalers. When Jeff Bezos started warehousing books, he cut out one link in that chain and has applied that model to sell millions of other products. The key is a more efficient warehouse-distribution system, that is, a much skinnier supply chain.
— Re-invent Inventory Systems. Amazon’s great power lies in its computer systems, which track the location and movement of millions of items. What if Amazon efficiently applied its computing power to the even-more complex food distribution system, which relies on moving perishable items into warehouses and stores before they spoil?
The massive disruption in inventory systems is this: Amazon will establish direct relationships with farmers, thus trimming the produce and meat distribution network. Cut the middleman out and you can offer faster delivery and a greater quantity of goods at a lower price.
— Re-invent The Retail Experience. Two powerful trends have reshaped grocery chains in recent years: They either became massive warehouse experiences (Costco, Wal-Mart) or more intimate (Whole Foods, Trader Joes).
There are two kinds of shoppers that Amazon will embrace in taking over Whole Foods’ 460 stores. Those who need an intimate, bricks-and-mortar food-buying experience and those who don’t.
For example, I’m the kind of person who likes small stores. I don’t like to be overwhelmed by excessive lighting, massive space and the best of Billy Joel. I like to inspect and touch my produce, meat and fish. For me, it’s an essential tactile experience, but I don’t want to spend a lot of time in a store.
Then there are those who don’t want to be in a store at all. They know what they need and want to order from their mobile device. They won’t — or can’t — spend the time shopping. If Amazon streamlines the online ordering and delivery process, it will be a boon for them.
— Re-invent The Logistics. One key to re-inventing the grocery business is shortening the length and transportation time from the producer to the consumer. Amazon essentially is buying an established entree into system with Whole Foods.
Whether Amazon can effectively deconstruct and rebuild the supply chain is another question. Have you seen an Amazon fulfillment center? It covers a physical space that looks like an auto plant from the highway — often more than 1 million square feet. They are labor-intensive operations, but will need an expanded work force and supply chain to handle food.
To add some context on their burgeoning labor growth, first note that Amazon is generally increasing net employment by hiring people to work across the company.
According to a company statement issued earlier this year, it plans to “create an additional 100,000 full-time, full-benefit jobs in the U.S. over the next 18 months. These new job opportunities are for people all across the country and with all types of experience, education and skill levels—from engineers and software developers to those seeking entry-level positions and on-the-job training.
Many of the roles will be in new fulfillment centers that have been announced over the past several months and are currently under construction in Texas, California, Florida, New Jersey and many other states across the country.”
Adds Jeff Bezos, Amazon founder and CEO: “Innovation is one of our guiding principles at Amazon, and it’s created hundreds of thousands of American jobs. These jobs are not just in our Seattle headquarters or in Silicon Valley—they’re in our customer service network, fulfillment centers and other facilities in local communities throughout the country,” he said in the statement.
All told, Amazon said it expects to grow its workforce from “180,000 in 2016 to over 280,000 by mid-2018,” although the company’s impact on overall grocery industry employment is not clear.
–Re-Invent the Labor Quotient. The grocery business is labor intensive. You need stockers, cashiers, meatcutters, deli workers, bakers and layers upon layers of middle managers in the modern grocery store. Some chains provide even more service with in-store restaurants, bars and coffee shops.
A streamlined distribution model strips out of lot of this labor. If you have automated distribution, you don’t need the people in the store. That’s incredibly bad news for the nearly 3 million employed by the industry. Robots will take over thousands of warehouse jobs and enhanced delivery will hurt the in-store employment of nearly every chain.
Just look at the long list of specialty jobs the Bureau of Labor Statistics tracks in the grocery industry. This is the dark side of Amazon’s potential role in food retailing — if it succeeds on a large scale.
“Amazon has no plans to use the technology it developed for Amazon Go to automate the jobs of cashiers at Whole Foods,” an Amazon spokesman told me in a statement. “No job reductions are planned as a result of the deal.”
No matter what happens with Amazon’s major plunge into the grocery industry, stores will continue to close and shoppers will demand a more personal experience with their food. But the massive dislocation that automation offers will also devour hundreds of thousands of retail jobs.
As David Pierson writes in the Los Angeles Times, it’s also possible that some shoppers will even reject Amazon’s model, particularly when it comes to delivery of things you haven’t seen before you purchase them:
“Despite a host of services, including AmazonFresh, Instacart and Peapod as well as many supermarkets themselves, interest has been far from explosive. Having a stranger pick out and delivery your ribeye steak, it turns out, is not the same as having someone deliver your Christmas presents.”
Like browsing for books in a store, touching (and then cooking) the food that you put in your body is one of the few exclusively human experiences that we need to preserve. Amazon may change the economics of this process in a profound way, but it will need to pay attention to the sensual dynamic at play.