How Whole Foods has changed in the five years since Amazon took over

Five years in the past, Amazon closed its $13.7 billion buy of Whole Foods, by far the greatest acquisition ever for the e-commerce and cloud computing large. Since then, Amazon has made lots of modifications to the specialty grocer, from reducing costs to embedding checkout expertise in its 500-plus U.S. shops.

Amazon has opened 60 new places, together with one “dark store” solely dedicated to filling on-line orders. Yet Whole Foods nonetheless controls simply over 1% of the grocery market, based on analysis agency Numerator, in contrast with Walmart’s 19% and Kroger’s 9%.

Next week, Whole Foods will get a brand new CEO for the first time since its founding in 1980. Operating chief Jason Buechel steps into the lead position on Sept. 1, succeeding colourful, polarizing co-founder John Mackey, who was as soon as described as a “right-wing hippie.”

“When you have the kind of culture clash that I imagined John Mackey and Amazon had, it’s really impressive that John stayed around in a leadership position as long as he did,” mentioned Jason Goldberg, chief commerce technique officer at promoting agency Publicis. “It surprised me.”

Buechel takes over at a pivotal time for Amazon, which is leaping deeper into the world of in-person retail, with a deal with groceries. Revenue at its bodily shops climbed 12% in the second quarter, whereas on-line gross sales dropped. That marks a change from the prior few years, when Amazon’s bodily shops lagged the total retail enterprise. Outside of the meals enterprise, Amazon just lately shut 68 shops, together with all Amazon Books, 4-star and Pop Up retailers.

Here are a few of the key variations in the Whole Foods of right now from the firm that Amazon acquired in 2017.

Operational modifications and suppliers

On the company aspect, Amazon centralized some operations, transferring them from particular person shops to Whole Foods’ Austin, Texas, headquarters. But it hasn’t change into a traditional grocery store like some predicted. Whole Foods says fairly than swapping out regional suppliers for greater names, the firm has added 3,000 native manufacturers in the previous five years, a 30% enhance since earlier than the Amazon deal. 

Each area has groups of full-time “foragers,” who look for new local products. Whole Foods says the model gives flexibility for smaller brands to remain in a few stores instead of having to supply products companywide. Amazon uses its data tools to help determine what brands get sold in what stores.

“Going right into a Cupertino retailer is a really completely different expertise, versus strolling right into a Los Altos or Los Gatos retailer in the similar Northern California area,” said Guru Hariharan, a former Amazon software development manager who now runs e-commerce management company CommerceIQ. “They’re most likely doing a greater job due to the personalization algorithms.”

There’s also a new accelerator program for local producers to earn a spot on the shelves of local stores, and certified training programs to turn hundreds of Whole Foods workers into accredited cheesemongers and butchers. While some of the hot food bars, free samples and specialty chef counters went away during the Covid pandemic, Whole Foods says they’re back.

As it scales up, Whole Foods insists it’s committed to keeping products local and clean. Since the Amazon deal, Whole Foods told CNBC it’s more than doubled its list of banned food ingredients, bringing the total to more than 250. It prohibits things like hydrogenated fats, high fructose corn syrup and artificial sweeteners, and meat must be free of antibiotics and added hormones.

Whole Foods said it’s also enhanced the standards for canned tuna, eggs and chicken. In 2019, it banned plastic straws and minimized other plastics by introducing new types of produce bags and rotisserie chicken containers.

Changes have come quickly, but the transition hasn’t all been smooth for Whole Foods’ workforce.

A year after the purchase, a group of Whole Foods staffers emailed thousands of fellow workers with a list of takeover-related grievances, including the removal of some stock options and “always being requested to do extra with much less sources and now with much less compensation.” Some workers tried to unionize under the large Retail, Wholesale and Department Store Union, but those efforts have stalled.

Amazon’s Just Walk Out checkout-free shopping uses a palm-scanning technology to automatically charge purchases without using a wallet or phone, shown here on June 12, 2022, in the Glover Park Whole Foods Market in Washington, D.C.

Autonomous shopping

For shoppers, the most visible change to stores is the technology inside the doors.

Customers can now enroll their palm print with Amazon One to pay without a card or phone. A device scans your palm, triggering a charge to your Amazon account. It’s available at more than 20 Whole Foods locations, with 65 more stores in California coming onboard soon.

Privacy advocates are speaking up.

“When you begin utilizing biometrics for cost, individuals, rightly so, are involved about that and the way these biometrics are getting used,” Goldberg said.

Amazon is also selling the palm-scanning tech to other retailers and event venues. But in March, one customer — Denver’s Red Rocks Amphitheatre — backed out of a deal after activist groups and musicians like Rage Against the Machine voiced concerns that Amazon would share palm prints with government agencies.

At Whole Foods, the palm-scanning devices are a key part of another tech solution that allows checkout-free shopping. Amazon has launched Just Walk Out at two Whole Foods so far, one in Washington, D.C., and one in Los Angeles. 

Amazon wouldn’t give CNBC an official tour, so we tested the Washington store on our own. Hundreds of cameras watched our every move. An associate said almost everything was being weighed by hidden scales that can identify the moment something as light as a bag of potato chips leaves the shelf. 

We exited smoothly through the Just Walk Out turnstiles, paying with a palm scan. But the receipt we received by email hours later wasn’t accurate and missed several items, most likely because we’d briefly left the highly monitored part of the store.

“The first model of any of this stuff, that form of day one expertise as Amazon likes to name it, are all the time going to be imperfect and have the potential to place clients off if it is actually unhealthy sufficient,” Goldberg said.

Amazon told CNBC that Just Walk Out is “extremely correct” and that customers have 30 days to request a refund if there’s a discrepancy on the digital receipt. In terms of privacy concerns and whether the company is selling personal data to consumer goods companies, Amazon said any sensitive information is treated in accordance with its long-standing policies, including only sharing aggregate, anonymized insights with brands. 

The privacy issue has gained resonance of late as Amazon has expanded its data collection mechanisms. In addition to millions of online shoppers, there are Alexa devices, Ring doorbell cameras and soon room-mapping robot vacuums.

“It’s very uncommon {that a} grocer additionally has these unimaginable digital expertise choices that may assist it get by way of tougher intervals,” said Ethan Chernofsky, lead data analyst at Placer.ai, a location analytics company. “There is a sense that with their expertise experience, they will determine parts of scale and revenue maximization that perhaps others cannot.”

One of Amazon’s competitors in the autonomous retail space is AiFi, which has its computer vision system installed in 84 stores, including Aldi in Europe, concession stands at the Detroit Lions stadium, 50 of Poland’s largest convenience stores and gas station mini-marts in California. Instead of scaring customers, AiFi’s chief technology officer, Joao Diogo Falcao, said it drives them to buy more.

“There’s anecdotal proof that claims that you just purchase extra merchandise since you by no means have a look at your pockets,” Falcao said. “We’ve seen 20% basket will increase when the retailer has been operating for some time. We additionally see that with sufficient adoption, with sufficient advertising, you’ve purchasers come in after which it is a sticky expertise. They prefer it, so they arrive again.”

Amazon has another experiment in removing the checkout bottleneck that doesn’t use computer vision or biometrics. The Dash Cart tracks and tallies items as shoppers place them in the cart. The carts are currently limited to a very small amount of groceries and can’t go to the parking lot to be unloaded. The Dash Cart is soon coming to its first Whole Foods in Westford, Massachusetts. 

Amazon’s in-house 365 private label goods have

Brooks Kraft LLC/Corbis via Getty Images

Lowering prices with more private-label goods

Amazon’s commitment to low prices didn’t align with Whole Foods’ image at the time of the acquisition, when the grocer was often called “complete paycheck” and mocked for selling $6 asparagus-infused water.

An Amazon spokesperson told CNBC in a statement that its goal was to “make top quality, natural meals extra inexpensive and accessible for everybody,” and that it’s since “lowered costs throughout aisles at Whole Foods Market, supplied Prime Membership Discounts and Prime Member Deals in-stores.”

Amazon also started focusing on selling products with bigger profit margins, an especially difficult task in the grocery business.

“You promote lots of greenback bananas that you just pay 99 cents,” said Goldberg. “So it’s a must to be actually environment friendly to earn cash. And the overwhelming majority or chunk of the stuff you promote are perishable.”

One way to boost margins is to sell private-label goods, or in-house products. At Whole Foods, the 365 private label got a brand refresh in 2020. Whole Foods says it added 295 new products to the 365 line last year, bringing the total number to 2,200 today.

“What Amazon has been slowly beginning to do is substitute lots of the purchases in Whole Foods with this private-label model, and that has allowed them to convey costs down,” Hariharan said.

Amazon has at least 111 private-label brands, according to Coresight Research. They include Amazon Basics and Solimo for household goods and Amazon Essentials for clothes. Amazon has also been accused of using its data prowess to give its in-house products an unfair advantage.

Moving online orders to ‘dark stores’

Online grocery orders are another key area for Amazon. Whole Foods told CNBC it delivered three times as many online orders in 2020, the year the pandemic hit, as in 2019. 

“Orders are shifting on-line, however they’re typically not worthwhile,” Goldberg said. “Every grocer in America is in digital grocery. They’re making an attempt to seize that digital grocery buyer, however they’re additionally making an attempt to determine the best way to make it extra worthwhile.”

For Whole Foods, that means expansion, because closer proximity to customers equates to more affordable delivery. Whole Foods says its 533 global stores can now serve more than 170 million customers in the U.S., Canada and the U.K.

Whole Foods also built a so-called dark store in Brooklyn, New York. It’s closed to customers and is completely dedicated to preparing delivery orders. Goldberg says Walmart, Albertsons and Kroger are experimenting with the concept as well, bringing in robots to pick orders and cutting back on labor costs.

“Competing with skilled buyers is transferring up on the frustration scale for a lot of, many shoppers,” Goldberg said. “That’s a part of the cause that some retailers have experimented with both darkish shops or achievement facilities.”

Instacart used to have an exclusive deal to fill Whole Foods online orders, but that came to an end the year after Amazon took over. Now, Amazon has transitioned the majority of those gig workers to official Whole Foods employees. Other employees are in charge of monitoring a part of the store where Amazon online customers can pick up packages and drop off returns, often without a box.

The Whole Foods scorecard

The success of the Whole Foods acquisition is difficult to measure because Amazon rolls its sales into the physical stores category, alongside its 60 Amazon Fresh grocery stores, an Amazon Style clothing store and 25 smaller Amazon Go stores. But Whole Foods is by far the biggest individual contributor in the group.

Earlier this year, things looked a little bleak. Days after Amazon missed estimates for its first-quarter earnings results, the company announced the closure of six Whole Foods stores.

As consumers get back into the habit of shopping in person, Whole Foods is showing signs of recovery. Placer.ai found the number of visits people make to Whole Foods is now hovering at about the same level as July 2017, before Amazon took over.

“Since the begin of the pandemic, Whole Foods was one in all the harder-hit groceries and its restoration pattern has been much less sturdy than others,” Chernofsky said. As for the six Whole Foods closures, he added, “It actually is right-sizing, and it is a push in the direction of optimization.”

Since the other retail closures in April, Amazon has opened seven new Amazon Fresh stores, a more mainstream grocer with 41 stores in the U.S. and 19 in the U.K. Whole Foods also told CNBC it’s adding 50 new stores in fast-growing regions soon. 

“You have the potential for this three-pronged strategy to assault grocery, which is Amazon Go as this excellent city fast in-and-out alternative, then Amazon Fresh as comfort value-oriented, going into the suburbs and in some city areas as nicely,” said Chernofsky, adding that Whole Foods will likely remain a more high-end grocer. “That combine could possibly be extremely potent.”

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