Why Whole Foods Is Amazon's Biggest Risk

CEO Jeff Bezos of e-commerce leader Amazon.com Inc. (AMZN) faces one of the biggest risks, and most daunting challenges, of his career with his upcoming acquisition of upscale grocery chain Whole Foods Market Inc. (WFM), the Wall Street Journal reports. In general, Amazon.com has bought successful companies and left them pretty much alone, the Journal says. For example, it has been very hands-off with online footwear merchant Zappos.com Inc., purchased for $1.2 billion in 2009, per the Journal.

The Whole Foods buyout comes at a much richer price tag, $13.7 billion, involves an underperforming target, and offers few obvious synergies for Amazon. Meanwhile, Chinese e-commerce giant JD.com Inc. (JD) and the world's largest brick-and-mortar retailer, Wal-Mart Stores Inc. (WMT), have forged an alliance that offers obvious benefits to both. (For more, see also: Why Amazon Is Losing to JD.com and Wal-Mart.)

Bait-and-Switch Buyout?

The major exception to Amazon's hands-off policy with acquisitions comes when it makes them to increase scale or eliminate rivals, the Journal notes. In 2010, after fighting a pricing war with Quidsi Inc., Amazon bought this online seller of household staples, whose websites included Diapers.com and Soap.com, for about $550 million, the Journal says. The stated original plan was to let Quidsi continue as a standalone entity with its own identity, much like Zappos. However, the Journal says, Amazon soon started consolidating operations, leading to clashes with Quidsi's management, then the eventual shuttering of the unit in March, claiming that it was unprofitable, as described in another Journal article.

Nonetheless, Amazon continues to sell product lines formerly associated with Quidsi, using the diapers.com and soap.com names under the legend of "Welcome to our new home." By folding Quidsi's product lines into its main website, Amazon has opened up cross-selling possibilities that probably would not exist if Quidsi had remained standalone.

A Whole Bag Full of Issues

Whole Foods is unlikely to suffer the fate of Quidsi, simply because it is a brick-and-mortar entity not suitable for complete absorption into Amazon's main online sales channel. But for Amazon, brick-and-mortar retailing, especially in groceries, is outside its established zone of competence. Meanwhile, Whole Foods is in need of restructuring and reorganization that will reduce its many inefficiencies. However, too radical a turnaround plan risks alienating Whole Foods' staff and customers alike, which may have the unintended result of exacerbating same-store sales declines, the Journal warns.

In particular, a clash of corporate cultures is likely. Whole Foods gives individual stores a fair amount of autonomy and rewards employee loyalty. Amazon, on the other hand, seeks uniformity and puts a premium on performance, with little concern about staff turnover, according to people familiar with both companies interviewed by the Journal. In other words, an automation-oriented company is taking the reins of a people-focused company. The big question is whether this marriage can work.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.