Amazon/Whole Foods Merger Still Shrouded In Mystery

Though Amazon is still playing mum about its plans for Whole Foods (should the deal be approved by U.S. regulators), its quarterly earnings call did shed some light on the eCommerce giant’s strategy. What it essentially boils down to is an experiment — a $13.7 billion experiment and a large cog in the eTailer’s grander grocery experiment.

Amazon, of course, has been running this experiment for a number of years, starting all the way back during the dot-com boom with an investment in the early online grocery service HomeGrocer.

Today, AmazonFresh and Prime Now bring groceries directly to customers’ doors, while Prime members in the Seattle area, where Amazon is headquartered, can click and collect their groceries at two locations through the AmazonFresh Pickup program. The company has floated the idea of launching its own meal kit service.

Also in Seattle, the company has been beta testing a cashier-less brick-and-mortar grocery store called Amazon Go, which uses computer vision and payments technology to simply charge customers’ accounts as they leave the store — no checkout queue required.

All of that is part of what Karen Webster thinks of as the company’s war strategy, and none of it is going to go away. Amazon’s plans for Whole Foods won’t replace the existing strategy built on Fresh, Go and Prime Now; they are just another play in the protracted grocery war.

“We believe there’ll be no one solution, so we’re experimenting with a number of the formats, from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and AmazonFresh,” Amazon CFO Brian Olsavsky said on the company’s Q2 earnings call on July 27. “And we’ll see how customers respond. We like the response that we’ve seen so far. We think … all those are valuable services.”

Because the merger is still pending review and approval by U.S. regulators to ensure it doesn’t violate antitrust laws, the company was not able to go into greater specifics at the time of the earnings call, but there have been some rumblings worth noting.

For instance, based on Olsavsky’s remarks about the success of Amazon’s brick-and-mortar bookstores, VentureBeat speculated that the company could use its 400 new physical locations as testing grounds for customers to try out new Alexa devices — sort of like if the produce section started selling Apple instead of just apples.

This strategy has proven successful at Amazon’s bookstores and could work out well among Whole Foods’ middle- and upper-class shoppers, who may be in a better position to adopt expensive home robots ahead of the curve, should Amazon go that route.

Fortune and others predict that, just as Amazon forced publishers and authors to change how books were made and cut costs, the industry giant could force packaged goods providers to do the same. Many are speculating that Whole Foods prices will decrease as a result of the merger, and most manufactured foods companies are already under a lot of stress from Walmart’s activity in the grocery sector.

Both Amazon and Whole Foods offered lackluster performances this quarter, with Whole Foods seeing its eighth consecutive quarter of declining same-store sales (no surprise there) and Amazon falling short on earnings despite beating revenue estimates. Expenses such as rising marketing and fulfillment costs, new hires in software engineering and sales, development of the Echo smart speakers and bigger, better warehouses prevented Amazon from meeting Wall Street’s expectations in the second quarter, Business Insider reported. Actual earnings missed analysts’ forecasts by a mile. The merger with Whole Foods did not impact the numbers since, again, it has yet to be completed. After the earnings report, stocks dropped nearly 3 percent.

That’s not to say that Amazon is hurting in the wallet department, but Jeff Bezos would probably feel better if the completed merger could drive some new profits to make up for the shortfall. Yet even if it doesn’t, Forbes sees two huge reasons why Amazon still wins.

First, it’s gaining critical data on grocery buying habits and patterns, including correlations between purchases of different products and categories, that will help the company tailor its grocery experience to the individual. And the data is more valuable than what Amazon could have gotten by acquiring, say, Aldi or Kroger because, with its affluent customer base, Whole Foods shoppers represent high margin upsell opportunities for Amazon.

Second, Amazon gets Whole Foods’ 365 private label brand. Exclusive brands encourage shoppers to get these products through Amazon rather than going elsewhere, a benefit that national brands don’t enjoy.

Plus, it doesn’t hurt that the merger would give Amazon 400 physical retail locations, giving it an even stronger edge over traditional retailers and grocers.