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Farm Fresh Alexa: Implication of Amazon’s acquisition of Whole Foods for sustainable food system

Written by Libby Christensen, a 2017-2018 Sustainability Leadership Fellow and Post-Doctoral Fellow in the Department of Agricultural and Resource Economics

Last week I posed the question to my class, if you had $200 million, what would you do to fix the food system? Over the last two and half months, I have been meeting weekly with 40 undergraduate students in the Department of Food Science and Human Nutrition. During class, we discuss the strengths and weaknesses of the current food systems, and efforts around the country to improve or develop alternatives to that system. Each week, I encourage my student to consider the challenges to creating a sustainable food system by exploring a particular topic be it food waste, livestock production, food deserts, or the distribution system. One event that was recently in the news with important implications for the future of the U.S. food system is Amazon’s acquisition of Whole Foods.

At its core, the issue is around concentration in the food system. Amazon simplified many of our lives. Through their coordinated supply chains and easy online interfaces, they created a one-stop shop for all of our modern needs from entertainment to toilet paper. While their expansion into food has the potential to increase efficiencies and expanded access to a greater array of food products, the consolidation of market share by one entity has the potential to distort the market. As was noted in Spider Man, “With great power, comes great responsibility”.

Whole Foods started in 1980 as a small natural food store in Austin, Texas. Beginning in 1984, Whole Foods quickly expanded beyond the city of Austin. First opening stores in Houston and Dallas, and in 1989 opening their first California location. It then began aggressively expanding through the acquisition of smaller, geographically limited, natural food stores across the country (Howard, 2009). Whole Foods opened its 100th store in 1999, quickly becoming the nation’s most visible natural and organic food retailer.

As organic foods increased in popularity and represented one of the biggest growth categories for traditional food retailers, competition for market share increased. By 2015, traditional grocers and supercenter centers were responsible for 53% of organic food sales, while natural retailers, like Whole Foods, accounted for just over 37% (OTA, 2016). By the first quarter of 2017, Whole Foods reported its worst performance in a decade, and closed nine stores. As one analyst for Edward Jones explained, “Whole Foods created this space and had it all to themselves for years, but in the past five years a lot of people started piling in. And now there is a lot of competition” (quoted in Dewey, 2017).

In June of 2017, Amazon announced its plan to acquire Whole Foods. After one month of review by the U.S. Federal Trade Commission, Amazon closed on the acquisition on August 29, 2017 for $13.7 billion (Bhattarai, 2017). The acquisition catapults the e-commerce giant into hundreds of physical stores and fulfills a long-term goal of selling more groceries.

Despite its impressive growth, Whole Foods is still relatively small compared to other food retailers, accounting for 1.2% of the food retail market share (Cheddar Berk, 2017). Yet, it presents a unique opportunity for Amazon to finally successfully enter the world of food sales. Despite being the world’s largest online retail, with sales greater than the next ten online retailers combined, Amazon has continued to struggle with food sales. In 2007, Amazon tried to break into food sales with Fresh, and expanded its food offering with Prime Pantry and experimented with Go, a fully automated grocery store in Seattle, without much success. The acquisition of Whole Foods provides Amazon a proven venue for food sales.

Amazon’s purchase of Whole Foods sent shockwaves throughout the food retail sector. Stocks for other food retailers dropped dramatically. It has also left many of us in the field of food systems, considering the broader implications for the future of the U.S. food system.

The first visible impact of the acquisition for consumers was lower prices on key food staples across the store. The lower prices were concentrated at the front of the store on items like bananas, eggs, and avocados. Newspaper articles led with headlines like, “The real price of Whole Foods’ suddenly cheaper avocados” from Slate, “ Amazon’s play to rattle Whole Foods rivals: Cheaper kale and avocado” from the NY Times, and “Amazon will cut prices on avocados at Whole Foods” from The Verge. In an industrial sector with relatively inelastic pricing, the company made a concerted effort to effectively highlight the change in prices, showing prices before and after the acquisition. While this may have a short-term positive impact on the accessibility of healthy food options for consumers, some fear the initial lowering of prices is a ploy to attract new customers. Once the company secures the desired market share, Amazon will be able to make monopolistic decisions regarding what products are available and at what price. Quotes from two food system experts capture the potential opportunities and threats of the merger. Marion Nestle, professor of in NYU’s Nutrition and Food Studies program was quoted as saying, “This is monopoly capitalism in action” while Brian Frank, a food tech investor and advisor, posits that Amazon knowledge and expertise in the world of supply chain logistics “will democratize access and over time hopefully will create efficiencies that will reduce price” (both quoted in Giller, 2017).

For now it seems only time will tell how the acquisition of Whole Foods by Amazon will play out with regards to the sustainability of the U.S. food system. Much of the conversation surrounding the acquisition echoes the fears and hopes expressed during the expansion of Wal-Mart.

 

REFERENCES:

Bhattarai, A. (2017, August 23). FTC Clears Amazon.com Purchase of Whole Foods. Washington Post.

Cheddar Berk, C. (2017, June 16). Amazon and Whole Foods Control Only a Sliver of the Grocery Market – For Now. CNBC.

Dewey, C. (2017, February 9). Why Whole Foods is Now Struggling? Washington Post.

Giller, M. (2017, August 24). Whole Foods Prices Will Drop Significantly After Amazon Deal. Eater.

Heins, S. (2017, August 28). Whole Foods Trots Out Cheap Avocados and ‘Farm Fresh’ Alexa Devices on 1st Day of Amazon Takeover. Gothamist.

Howard, P. (2009). Organic Industry Structure. Media-N: Journal of the New Media Caucus, 5(3).

Organic trade Association. (2016). U.S. Organic Sales Post New Record of $43.3 Billion in 2015. Washington, D.C.

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