We know Amazon is an online retail giant. It’s capturing half of all online retail sales. There are Amazon planes. And we also know that it is a content company — it owns Audible, and is fast producing media through Amazon Prime. Yet thinking about their grown in terms of size is only part of the picture.
While Amazon runs digital, in 2018 it only captured 5% of total retail sales. Physical retail was the seemingly insurmountable gap. The question some would ask is how would digital overtake physical, and while maybe Amazon asked that question of itself, its acquisition of Whole Foods opens the business up in a way that shows how this question is a little too narrow.
An article on Stratechery that was published a couple years ago, even today helps show that to think of Amazon as a digital retailer is to miss the underlying picture. Amazon is not just beating the competition in terms of volume, it is beating it in terms of structure. Take Amazon Web Services as an example:
….if it is better to build an Internet-enabled business on the public cloud, and if all businesses will soon be Internet-enabled businesses, it follows that AWS is well-placed to take a cut of all business activity.
- AWS has massive fixed costs but benefits tremendously from economies of scale
- The cost to build AWS was justified because the first and best customer is Amazon’s e-commerce business
- AWS’s focus on “primitives” meant it could be sold as-is to developers beyond Amazon, increasing the returns to scale and, by extension, deepening AWS’ moat
The Whole Foods acquisition opens the door to similar potential:
Today, all of the logistics that go into a Whole Foods store are for the purpose of stocking physical shelves: the entire operation is integrated. What I expect Amazon to do over the next few years is transform the Whole Foods supply chain into a service architecture based on primitives: meat, fruit, vegetables, baked goods, non-perishables (Whole Foods’ outsized reliance on store brands is something that I’m sure was very attractive to Amazon). What will make this massive investment worth it, though, is that there will be a guaranteed customer: Whole Foods Markets.
In the long run, physical grocery stores will be only one of Amazon Grocery Services’ customers: obviously a home delivery service will be another, and it will be far more efficient than a company like Instacart trying to layer on top of Whole Foods’ current integrated model.
I suspect Amazon’s ambitions stretch further, though: Amazon Grocery Services will be well-placed to start supplying restaurants too, gaining Amazon access to another big cut of economic activity. It is the AWS model, which is to say it is the Amazon model, but like AWS, the key to profitability is having a first-and-best customer able to utilize the massive investment necessary to build the service out in the first place.
Amazon is itself the beneficiary of its businesses. This is not novel, but when thinking about the immense scale of e-commerce, and now food services (groceries alone account for 20% consumer spending) there is suddenly a lot more depth to Amazon’s potential.
Read the whole post over at Stratechery.