A Strategic Analysis

This report provides an in-depth analysis of the impact of Amazon's recent acquisition of Whole Foods, uses analytical models to assess the business environment and strategies, and also presents strategies that Amazon may adopt in the future. A PESTEL analysis of the e-commerce grocery industry revealed various trends, including: B. Rising online shopping habits, government support, and rising disposable income all speak to the importance of the industry. Porter's application of his five powers highlighted the highly competitive nature of the USA which is dominated by Walmart, Kroger, Albertsons, and Costco, proving it to be a rather unattractive industry to enter.

The created an amalgam of resources and capabilities whose thorough examination suggested the implementation of a Hybrid strategy by the company. Through a combination of its financial resources (increased market share, a 60% increase in stock price, outstanding price-to-earnings and price-to-book ratios), extensive customer insight, advanced technology and personable Whole Foods employees all of which possess VRIO (valuable, rare, costly to imitate, organized to capture value) characteristics, the company can achieve sustained competitive advantage in this cut-throat industry.

The firm is seemingly pursuing both market development and product development strategies. Their high degree of vertical integration to increase profit margins and promote differentiation is also apparent. Furthermore, the analysis brings to light the culture clash between the profit-driven Amazon and ethically motivated Whole Foods while also contrasting their autocratic and participative leadership styles, respectively.

It is therefore suggested that in its quest to become the industry leader through continuous innovation and unparalleled supply chain knowledge, Amazon pay close attention to bridging the gap between the two corporate cultures and increase its efforts at improving its social responsibility image in order to reign supreme.

Executive Summary i

1.Introduction 1

2. The Strategic Analysis 2

2.1. The Macro External Environment 2

2.2. The Micro External Environment 3

2.3. Internal analysis 5

2.4. Analysis of a corporate level strategy in a global context 8

Analysis of Strategic Leadership and Ethical Issues 10

4. Conclusion 12

5. References 13

1. Introduction

Amazon.com, Inc., is an e-commerce giant offering a wide range of goods and services. The company typically purchases merchandise from third-party sellers and vendors for resale. This Report contains a detailed analysis of the implications of Amazon’s recent acquisition of Whole Foods. Firstly, the broad trends that influence the e-commerce grocery industry are evaluated using the PESTEL framework after which the competitiveness of the U.S. grocery industry is assessed via the application of Porter’s Five Forces. Next, the combined resources and capabilities resulting from the merger are examined to determine if the business strategy brings about a sustained competitive advantage. Additionally, the corporate level strategies evident from this acquisition are analysed while also offering suggestions for strategies that can be employed in the future. Finally, the public’s perception of the merger is approached with a focus on organisational ethics and leadership concepts.

2. The Strategic Analysis

2.1. The Macro External Environment

Table 1: The PESTEL analysis of the e-commerce grocery industry

Political

Economic

Greater political stability facilitates future expansion.

Greater governmental support for e-commerce.

Improved governmental efforts at strengthening cyber-security.

Economic stability in the market increases the chances of success.

Customer’s increased disposable income enhances their propensity to spend on groceries/food (Figure 1).

Sociocultural

Technological

Greater consumerism increases potential for growth.

Rising online shopping habits.

Growing health-consciousness (Ali, Kapoor, and Moorthy 2010).

USA ranks third among the number of internet users globally with 287 million people (76.18%) (Statista 2017).

Popularity of E-commerce shows steady growth.

This enhances communication with target markets.

Legal

Environmental

Increased regulation of products reduces sale of counterfeit products online.

Greater opportunities to enhance brand image by employing suitable CSR policies which aim to address eco-friendly regulations.

Sales of reusable bags in the U.S. grocery industry were $75 million in 2015 (Figure 2).

This leads to cost reductions.

The energy consumed in the production of organic food is about 30 to 50% less thereby reducing the carbon footprint.

Delivery of groceries reduces the carbon footprint produced by personal transportation which contributes to 15% (Figure 3).

The PESTEL Analysis is a model employed to determine the external factors which influence a company’s macro-environment (Rothaermel 2012). For the purpose of this study, the conditions shaping the online grocery retail market are considered. As tabulated above, the industry is governed by many factors, which if manipulated correctly can greatly contribute towards the long-term success of a company.

Figure 1: Figure showing the highest ever recorded disposable income of $14513.30 in America in October 2017 (source: tradingeconomics.com).

Figure 2: U.S. consumer usage of reusable bags in 2015 (source: Statista.com)

Figure 3: Figure showing food-related personal transportation as a fraction of the total footprint (source: Kling and Hough 2010).

2.2. The Micro External Environment

Over the recent years, the sale of online groceries has grown significantly. In fact, they are predicted to possess 20% of the market share in the U.S. by 2025 (Yeh, Plante, and Agrawal 2011). With increasing demand, however, comes increasing competition. For the purpose of analysing the competitive environment of the online grocery retailing industry in the USA, Porter’s Five Forces Analysis is used (Porter 1997).

Threat of New Entrants (MODERATE)

Low barriers to entry

Entry facilitated via brand development & acquisitions

Costly brand development dampens the impact of new entrants.

Bargaining power of buyer’s (HIGH)

Low switching cost for inelastic goods

Wide range of options

Online presence allows for easy comparing

Competitive Rivalry (HIGH)

Walmart, Kroger, Albertsons, Costco.

Increased cost of promotions

Greater choices for customers.

Threat of substitutes (HIGH)

Groceries sell at low margins which proves price reduction to be tough.

Bargaining power of suppliers (LOW)

Suppliers favour large scale retailers over SMEs.

Selling online helps cut costs

Figure 4: Graphical application of Porter’s Five Forces to the U.S. grocery industry.

The main competition existing in the grocery industry comes from Walmart, Kroger, Albertson’s and Costco. Due to this fierce competition, the grocery industry typically operates on low margins and is constantly subject to price cutting. Despite the many customer loyalty schemes in place, customers are presented with the opportunity to choose between many stores without incurring additional costs. Those who dominate the industry, however, have greater bargaining power when it comes to suppliers as owed to their large-scaled operations. New entrants do not encounter many barriers. However, the scale at which they operate is the determining factor (Thomas, Staatz, and Pierson 1995). For example, the advantages possessed by big players in terms of marketing, purchasing, distribution, and finance prove almost impossible for smaller players to compete with (Dobbs 2014).

2.3. Internal analysis

The resource-based view model contends that resources help businesses gain competitive advantage and are therefore pivotal to superior business performance (Barney 1991). As illustrated in the figure below, the resources must also display VRIO attributes (Valuable, rare, costly to imitate & organized to capture value) so as to gain a sustained competitive advantage (Prahalad and Hamel 1990).

As it is previously mentioned, the grocery industry is fiercely competitive with particularly thin margins and is therefore not an attractive market to enter. Therefore the emphasis is placed on the significance of Amazon’s and Whole Foods combined resources and capabilities in order to rise above the competition (Helfat and Peteraf 2003).

The acquisition caused a 60% increase in Amazon’s stock price and is now valued at $1174.26 (Ovid 2017). Amazon’s price-to-earnings ratio is over 900 and its price-to-book ratio is over 30, which is a feat unachieved by even Apple and Microsoft (Ovid 2017). Therefore, by acquiring Whole Foods and increasing its market share, Amazon would most likely leverage scale economies which could result in lower costs, thereby deriving competitive advantage via a cost-leadership strategy (Hill 1998).

Furthermore, Whole Foods consumer base together with Amazon’s extensive shopper database present food manufacturers with a wealth of customer insight to be used in marketing, brand-building and targeted sales promotions (Petro 2017). Amazon also has the opportunity to construct predictive analytical models to identify what customers require, how much of it they need and when they need it. Such acts are characteristic of a differentiation strategy (Hill 1998). Hence it is apparent that Amazon is implementing a hybrid strategy.

Amazon immediately put to use its newly achieved resources, by first introducing cheaper prices which resulted in stocks of competitors to plummet (La Monica 2017). Whole Foods goods with reduced prices include bananas, organic avocados, eggs, leafy green, just to name a few (Taylor 2017). Other brands such as ‘Chobani’, ‘Siggis Yogurt’ and ‘Tom’s of Maine’ also experienced price cuts.

The newly acquired physical stores also began to serve their purpose. A Whole Foods store in Brooklyn displayed tech gadgets such as ‘Echo’ and ‘Echo Dots’ the very day the deal was finalized. Following this, many of its stores began selling Fire tablets, Fire TVs, and Kindle e-readers, even offering pre-Black-Friday discounts. Pop-up stored was also featured in select outlets, offering customers the chance to test out their products before purchasing (Taylor 2017).

Amazon also incorporated lockers in Whole Foods stores that enable customers to pick up shipped orders and resend returns during a visit to the store. Other Whole Foods brands (365, Whole Paws and Whole Catch) will also be available on Amazon’s online platforms (Taylor 2017).

Additionally, the Company is looking to replace the existing Whole Foods customer loyalty scheme with Amazon Prime (currently having 80 million members) which gives members access to a library of online entertainment content, in-store discounts, and various other benefits to further capture value and enhance the shopper’s experience (Taylor 2017).

Through these combined resources and capabilities, Amazon can now offer a far superior shopping experience, high-speed delivery, best prices, unique goods, cater to tailored needs (due to the possession of a deeper understanding of the consumers) all of which aim to promote longevity with the loyal consumer base (Binninger 2008).

Resource Based View of the Company

Intangible

Brand reputation

Customer base

Shopper database

Automation technologies

Tangible

440 physical stores

Wide assortment of products

Heterogeneous

Greater efficiency

Warehouses for faster delivery

Data centres

Immobile

Analytical knowledge

P/E ratio over 900

Increased stock prices ($1174.26)

VRIO Resources

Valuable – Unique products, greater differentiation

Rarity – Fastest delivery, greater understanding of customers

Costly to imitate- Brand development, lower production costs

Organized to capture value – use data to target sales promotions, leverage locations, offering delivery & pickup options.

Sustained Competitive Advantage

Figure 5: Application of the resource-based view model in the context of Amazon Whole Foods.

2.4. Analysis of a Corporate Level Strategy in a Global Context

Market Development

New Markets

Diversification

Product Development

Market Penetration

Existing Markets

Existing Products

New Products

Figure 6: Graphical representation of Ansoff’s growth Matrix.

Amazon’s acquisition of Whole Foods can be viewed as the firm’s attempt at expanding in two ways simultaneously (Market Development & Product Development). Firstly, as highlighted in the above matrix (Watts, Cope, and Hulme 1998), they are expanding across (Product Development). Their customer base is mainly convenience-driven, wherein they are willing and able to spend slightly more for grocery items so long as they are not required to visit the physical store (existing market). Thus, by offering these customers something new to purchase (organic food from a premium brand) they can incorporate a new aspect of the business into their existing Amazon habit. This, according to Afuah (2001) is a relatively low-risk strategy which is likely to reap a payoff.

Secondly, they are moving upwards (Market Development). All the changes Amazon is implementing in the Whole Foods outlets (price reductions, in-store sale of Amazon gadgets, using Amazon Prime to switch out their loyalty system) aims at drawing Whole Foods consumers (new market) to shop at Amazon’s ‘everything store’ (existing products) (Watts, Cope, and Hulme 1998).

By acquiring Whole Foods, which has a powerful private label (365 brand) Amazon is heading towards increasing its vertical integration (Harrigan 1985). Currently, it carries 8 private brands of apparel (Ella Moon and Mae, Lark, & Ro, etc) and has been expanding rapidly. It even offers diapers, batteries, baby wipes, all from private brands.

The reasons behind Amazon’s integration of private brands are as follows (Fronmueller and Reed 1996):

Product of private brands offers higher margins than third-party brands.

Integrating products of private brands represents differentiation.

In retail markets where all products are the same and national brands are easily available, exclusive brands act as an incentive for consumers to make purchases through Amazon rather than going elsewhere.

Below are some strategies Amazon could adopt in the future:

Increase efforts at building sales of online groceries, a relatively small yet growing segment in the industry (continuous innovation).

Utilize their expertise on supply chain and automation technology to lower costs.

Apply knowledge of largely affluent Whole Foods customer base to promote the sale of high margin “impulse” goods.

Leverage the general market assumption that the company will not pay dividends or gain substantial profits to reduce prices and make investments in the firm.

3. Analysis of Strategic Leadership and Ethical Issues

The merging of the two companies, however, can be perceived as a culture clash between the profit-driven Amazon and the ethically motivated Whole Foods. Whole Foods measures success using metrics likes employee happiness and customer satisfaction, while Amazon is driven by progress and profits (Crossland 2017).

According to Crossland (2017), Amazon has garnered a reputation as being a tough workplace with increasing pressure to meet deliverables, poor employee valuation, gruelling warehouse conditions, immense physical pressures, the usage of intensive surveillance, limited efforts at recycling and an absence of transparency in terms of sustainability reporting.

In stark contrast, Whole Foods has held the title of being one of America’s best companies to work at for twenty years straight despite a slightly lower hourly wage ($11/hour as opposed to around $12) (Wartzman 2017)with its continued efforts at fostering a sense of teamwork, responsible recycling and its move towards solar energy (Crossland 2017).

This acquisition is reminiscent of the 2006 acquisition of the socially conscious Body Shop by cosmetic giant L’Oreal, known for extensive animal testing. The cultural misfit between the companies decreased Body shop’s appeal, leading to declining sales, market share and operating profits (Koczor 2012). This debacle emphasises the significance of ideologies, which if mismatched lead to decreased value for stakeholders (Balmer, Fukakawa, and Gray 2007).

Additionally, many customers find the personability and knowledgeability of Whole Foods employees to be the contributing factor towards their superior experience. This coupled with Amazon’s constant implementation of robotics and automation to increase productivity and efficiency could pose as a threat to the business if Amazon fails to see the value created by the Whole Foods employees to its customers. While representatives of the company have refuted any claims of job reductions via automation, the staff is allegedly sceptical about events that could occur in the future.

This clash between the autocratic/competitive nature of Amazon could prove difficult to the more democratic/participative Whole Foods to conserve its image as the environmentally committed, independent, premium grocer (Grandz et al. 2013).

4. Conclusion

While the combined resources and capabilities of Amazon and Whole Foods offer the firm a competitive advantage to break through the fiercely competitive grocery industry, the more glaring ethical issues and potential conflicts in corporate culture should not be ignored. While Amazon’s prowess in analytics and continuous innovation are expected to bring about ground-breaking changes and financial gains, it is also pivotal that the firm recognizes the many ethical concerns and the value proposition brought about by the skilled Whole Foods employees and avoided automating them so as to uphold the image of the prestigious brand.

5. References

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