If you don’t know how Amazon really operates, I’ll bet you have no idea why it bought Whole Foods and what it really plans on doing with it.
Amazon.Com Inc. (NASDAQ:AMZN) is going to use Whole Foods the same way it used everything else. Just like it used its original bookselling fulfillment centers to sell everything to everyone, and how it used its Amazon Web Services platform to sell 40% of all cloud-based web services…
To take a piece of any and all economic activity… selling anything and everything.
Now, that includes food.
The Whole Foods acquisition fills in the missing link in Jeff Bezos’ grand plan to sell the world to the world, and profit from the sale of everything including books, clothes, food, and anything to do with data.
How Amazon Built Its Empire
When Amazon started selling books, it needed a fulfillment center to warehouse the books and be able to ship them directly to online buyers. This would put a direct line into customer’s homes and offices, as opposed to having publishers and distributors ship books on Amazon’s behalf.
The fulfillment center then became fulfillment centers (plural). The high cost of building massive fulfillment centers is offset by the fact that Amazon is the biggest customer of its fulfillment centers, since they warehouse other sellers’ goods shipped through Amazon.
Having transshipment fulfillment centers allows Amazon to handle all merchandise it sells… Which allows it to take a slice of someone else’s profit. They add in a profit for themselves and control shipping, which gives it direct access to customers.
If Amazon didn’t have its giant fulfillment centers, it couldn’t take a piece of everything that passes through its hands. It couldn’t take the profits it generates as a transshipper and make its own products that compete with both products sold through Amazon and products sold elsewhere.
By forming a trusted customer relationship (predicated on ease of shopping and competitive pricing and enhanced by Prime membership status), Amazon offers an extraordinary number of goods and services. To the great satisfaction of its customers, Amazon offers almost everything from entertainment to its own manufactured goods, for sale and delivery in short order.
That’s how Amazon created the relationship it has with its members and customers; it leveraged fulfillment centers to scale up the ultimate customer-centric selling platform.
Amazon does the same thing with AWS, Amazon Web Services.
Building the largest cloud services platform in the world is massively expensive. But again, Amazon’s huge fixed costs building AWS are offset by a lock on AWS’ first and best customer, Amazon itself.
Now, with its reach, scale, and masterfully curated relationship with developers who build services on AWS, Amazon is in a position to take a toll on quadrillions of bytes of data collection, storage, computation and transmission.
Starting to recognize a pattern?
That brings us to Whole Foods.
Our Inevitably Amazon-Branded Future
Grocery sales are the largest segment of consumer spending in the U.S., accounting for 20% of all sales
While Amazon’s waded into the “groceries” space, it lacked a leverageable fulcrum to create scale.
It gets just that with the purchase of Whole Foods for $13.4 billion.
With 457 stores in North America, Whole Foods gives Amazon an established foothold in the upscale retail store side of the healthy-food grocery business. But, far more importantly, Whole Foods gives Amazon 457 stocked and refrigerated fulfillment centers.
Buying all those fulfillment centers – which are already associated with quality, healthy groceries – is the leverage point Amazon’s been missing to scale grocery sales.
It’s that simple. But it’s only the beginning.
With an arsenal of fulfillment centers, pick-up centers, and shopping stores, Amazon will now change the grocery business the same way it changed retail in every other category.
Whole Foods’ brand is decidedly upscale, and when it comes to grocery sales that’s the best place to start.
It won’t take Amazon long to leverage Whole Foods’ upscale reputation into a wider offering of other grocery products and brands that aren’t as elevated or expensive as Whole Foods (or, Whole Paycheck as it’s sometimes called) into less expensive brands.
Eventually, this means Amazon-branded groceries.
Once Amazon’s locked and loaded in the grocery sector, its next target, only one step up from groceries, will be meal delivery services. Then it will be onto the next step, restaurants.
You can’t fault genius, even if it’s the possibly mad genius of Jeff Bezos’ Amazon of Everything.
What you can do is become genius yourself, and you do that by knowing not only where Amazon’s coming from but where it’s going.
We understand the Amazon of Everything over at Zenith Trading Circle. That’s why we bet heavily that Amazon would disrupt the grocery sector to the great detriment of traditional grocers, especially some of the big boys.
The fruits of our shopping for losers in Amazon’s way just netted us a tidy 995% gain (that’s not a typo) on some cheap The Kroger Co. (NYSE:KR) puts we bought for only 40 cents and sold last week at $4.38.
It pays to understand Amazon and its impact on retail.
Stay tuned. Next week, I’ll show you exactly how my paid subscribers are doing that right now – and making money hand over fist.