“Stocks aren’t lottery tickets. There’s a company attached to every share.”  – Peter Lynch

The big news of the quarter was the announcement that Amazon intends to purchase Whole Foods for $13.4B in a deal that will extend the online shopping mall into a bricks and mortar merchant with more than 460 physical locations in the US, Canada and Great Britain. What does this do for the company? Won’t this turn Amazon into one of its outdated, old-line competitors?

This transaction will, without a doubt, reshape the grocery business in the same way that Amazon upended numerous other industries. Because Amazon was built with an “Internet focused” business model, they have advantages over others in the grocery sector. Founded as a company to sell books over the Internet[1], Amazon built its infrastructure around processes to streamline the warehousing, ordering, fulfillment, and delivery of its goods. They created a nimble supply chain and logistics system that rivals that of UPS and The US Postal Service.

Amazon has been on a multi-year offensive to open warehouses increasingly closer to customers so it can deliver orders in as little as two hours. The purchase of Whole Foods stores will further narrow Amazon’s physical proximity to its core customers. The Whole Foods stores can now become locations for returning online orders of all kinds and another opportunity to sell additional merchandise. Eventually, the stores will add an alternative path for Amazon in reducing delivery times. Building the company from the Internet down is a clear advantage over peers such as Wal-Mart, Kroger, Alberstons and others who started with physical stores and then built websites to create an online presence and sell some of their inventory. The trend speaks to an evolving purchase model that puts the Internet first.

A case study for this model is men’s apparel company Bonobos. www.bonobos.com Bonobos was launched as an exclusively online retailer in 2007.

Bonobos Logo

Bonobos

As the company expanded its product assortment from men’s chinos to include suits, dress shirts, outerwear and tailored pieces, more customers requested the opportunity to “try before they buy”. In the fall of 2011, the company tested an e-commerce store at their New York City headquarters, calling the location a “Guideshop”. The purpose of the Guideshop was to provide a physical space for men to try on their Bonobos pants prior to the online purchase being placed. Within a year, the concept became integral to the firm’s service and business model. Guideshops display Bonobos’ full offering of merchandise, with sizing samples available across categories for men to try on. Customers work individually with a Bonobos “Guide” who serves as a shopping and styling assistant. After each appointment, Guideshop visitors receive an email with their fit and style preferences. Customers can also purchase on-site at the Guideshop locations through the website.[2]

The advantages of the Bonobos business model:

  • Customers have the convenience of being able to see, touch and feel merchandise and be assured of the clothing fit.
  • Customers place their order online, and the clothing is mailed to their doorstep quickly and conveniently.
  • Generous shipping return policies ensure customer satisfaction and also reduce the need for customers to visit the store for every purchase.
  • The company website emphasizes “Walk out Hands-Free.” The reality is that hands-free is somewhat convenient, but it is actually better for Bonobos to ship your clothing from their central warehouse rather than have your exact size and color at any Guideshop that you might visit.
  • No need for a large warehouse to serve that store location and, with a smaller footprint, lower rent costs.
  • Fewer sales staff needed to manage inventory, re-fold, and cleanup each day.
  • With no merchandise exchanging hands and more one-on-one attention, the amount of stolen merchandise (“shrinkage”) is reduced.

This Internet-first/ecommerce model is taking center stage and we are now beginning to see these companies pass the old-line. If you needed more evidence, on June 16th of this year, Wal-Mart agreed to acquire Bonobos for $310 million, making it a subsidiary within its fashion department. Wal-Mart purchased what they hope will be a roadmap for building their business around ecommerce[3].

The bigger picture for all of us is that the way we shop and consume is changing. The concept of getting into your car, driving to a set of football field sized clothing warehouses connected by a Cinnabon and a Panda Express to shop for goods is fading[4]. Boutique stores designed for customers to validate their size, ask a few questions and, perhaps, view the latest styles will be the norm. But once you find a brand that you like and you have a positive purchase experience, all repeat purchases will be made from the comfort of your home without needing to waste gas and travel time. Big Box stores are D-E-A-D. Malls (if we continue to call them that), will be smaller and much more “experience” focused. The land and extensive parking spaces[5] will be reclaimed for other uses.

Many of the brands that we grew up with will likely disappear. Big Box retailers such as JCPenney, Sears, K-Mart, Kohl’s are being slowly pulled into the event horizon of an imminent death spiral. Declining sales and mall foot traffic have induced management to close underperforming stores to reduce costs. Reduced store count leads to decreasing brand awareness that will further hamper sales. Any cash reclaimed by closing stores should be invested into shifting the company’s business model to one that is ecommerce centric, but will most likely be used to pay off debt and interest. Opportunity lost. Death spiral.

In other areas of the mall, specialty retailers such as GNC, Radio Shack, Bed, Bath and Beyond; and Vitamin Shoppe may not be long for the world either. These companies typically operate in smaller, more cost-efficient stores, but the products they sell are easily sold (or substituted with other products) on the Internet. If you want to buy protein, soap, vitamins, batteries, or sports supplements, you may walk into a store once. But after finding a product that works for you, all repeat purchases will be made online. And in the online world, the lowest price wins. If you have to support hundreds of physical stores, then you won’t be able to offer the absolute lowest prices.

Back to Whole Foods, Amazon has acquired a premium brand in the grocery category and they have the opportunity to apply their Internet-centric model to make Whole Foods more efficient. They will also integrate the Whole Foods store footprint into their existing distribution network to have better access to customers around the country.

Combined Amazon/Whole Foods Footprint

Whole Foods

Source: Bloomberg

Amazon had already been testing a new convenience store concept called Amazon Go that used sensors and software to allow shoppers to grab items and exit without even visiting a cashier. How will other grocers keep up? Hmmm.

 

 

[1] The first book purchased on Amazon was “Fluid Concepts And Creative Analogies: Computer Models Of The Fundamental Mechanisms Of Thought” by Douglas Hofstadter on April 3, 1995.
[2] Source: Wikipedia
[3] Wal-Mart acquired Jet.com for the exact same purpose.
[4] That’s basically what a mall is….
[5] Many will stop owning cars thanks to Über.

One comment

  1. Thanks for the interesting article.

    Bonobos’ model wreaks of Apple store’s delivery model too. – Relatively few stores, – very good, focused, technical expertise (only for Apple hardware and software). I have a feeling there’s lots of touchin’/feelin’ at the stores, and final decision makin’ in front of device screens with multiple windows of competing options before, …Decision made. …Ship n track to doorstep. …repeat! Genius!

    In addition to Amazon adding more paths to an already highly intelligent neural delivery network, also helping to mitigate risk/justify purchase, i’d imagine that Whole Foods also has a cult following that would be easy to expand if given an online, still fresh, good quality delivery option. Especially since they’ve already made the quality, vs value, vs cost calculations. For them, it’s simply a matter of factoring in the expanded lifestyle options offered by a “Whole Foods quality”/“Amazon convenience” “multi-task friendly” product.

    Like

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