Whole Foods deal gives Amazon even more access to consumers
Amazon is already a huge part of many people's lives. And its $13.7 billion deal for the organic grocer Whole Foods will likely bind its customers even more tightly.
The acquisition could easily hurt both Amazon's existing rivals and future startups that might one day challenge it. Yet, experts don't believe U.S. antitrust regulators will oppose the deal. That's largely because it doesn't create anything resembling a traditional monopoly.
Instead, it merely extends Amazon's long quest to make shopping so convenient that consumers won't even think about stepping away from its embrace. The more successful that strategy, the more Amazon can monopolize the attention and shopping dollars of its customers -- which, of course, is perfectly legal.
A QUESTION OF PRICE
Amazon is just one of several major tech companies -- such as Google and Facebook -- facing new scrutiny over their market power, which doesn't map neatly onto traditional notions of monopoly.
When a company dominates a market, it typically pushes up prices to boost profits -- something U.S. antitrust law is geared to prevent. Amazon, however, has a track record of keeping prices low and locking customers in to sell more stuff. For instance, the company typically sells gadgets like its tablets for little or no profit -- but then pushes people to buy digital movies they can watch on the tablet.
"Amazon's strategy has always been a volume strategy, not a profit strategy," said Lauren Beitelspacher, a marketing professor at Babson College in Massachusetts.
In a traditional sense, Amazon still faces lots of competition. Walmart remains the leading retailer overall, with more than three times Amazon's retail revenue. Even with Whole Foods, Amazon will have less than 3% of the U.S. market share in groceries, according to Kantar Retail. Walmart is the leader, with a 22% share last year.
And while Amazon is the clear leader in e-commerce, 90% of worldwide retail spending is still in brick-and-mortar stores, according to eMarketer.
Rather than dominate in market share, Amazon dominates "in reaching into customers' lives," said Gartner retail analyst Robert Hetu.
Amazon has gotten some complaints that its most prominent results in shopping searches aren't always the cheapest. But for many frequent customers -- the more affluent ones who tend to be members of Amazon's $99-a-year Prime loyalty program -- Hetu said Amazon just needs to be more convenient.
BANKING ON LOYALTY
Convenience can come in the form of Dash buttons, which put reorders of baby wipes or coffee beans a finger-press away. Voice-shopping capabilities in Alexa-enabled Echo speakers make it possible to shop while doing household chores.
Amazon also offers discounts for shoppers who sign up for regular delivery of frequently purchased items. Free shipping with a Prime membership makes it tempting to check Amazon first, even if rivals also offer free shipping for larger orders. And of course, Amazon offers bonuses and cash back when using its gift cards and credit cards.
Add to that a new feature resembling the social network Pinterest. Customers share their favourite designs, recipes, books and other items. While Pinterest users can buy what they like anywhere, Amazon Spark will direct customers to Amazon's own store.
"They are pervasive in the fun parts of life, shopping and entertainment," Beitelspacher said. "You have all these things that evoke positive feelings. So when they introduce something new, it's much easier for them to overcome the barriers of entry because they have this positive brand equity."
DEMANDS ON SUPPLIERS
Amazon's size also gives it tremendous buying power. Just like Walmart and other big companies, Amazon can use that power to wring low prices from suppliers of products and services it sells. While Amazon can pass those savings onto customers, analysts said smaller suppliers might have to reduce quality or staff to cut costs. Some might even go out of business.
On Monday, a union representing food-industry workers called on the Federal Trade Commission to scrutinize Amazon's deal for Whole Foods, citing the impact on suppliers, among other things.
But, U.S. antitrust officials tend to block deals only when they combine direct competitors -- say, if Amazon were to buy Walmart, or the other way around. Amazon doesn't currently have a big groceries business, and Whole Foods doesn't have a huge online or delivery operation, so they likely won't be considered direct rivals. Regulators typically look for consumer harm -- and might have trouble finding any.
Some suppliers are even looking forward to reaching Amazon's large customer base. In a statement, Amazon said it wanted Whole Foods to continue working with "small farms and producers" to bring natural and organic food to shoppers. The company declined further comment.