With Whole Foods Purchase, Amazon Gets Closer to Mastering the Customer Experience

Plus, what the acquisition means for Microsoft and Google

An Amazon logistics center. John MacDougall/AFP/Getty Images

Amazon announced its intention to buy Whole Foods last week, triggering stock price drops for several companies that investors presume will be affected by the takeover, such as grocers, WalMart, Target and others.

I personally feel a much more interesting deal would be between Aldi Nord and Amazon—imagine getting Trader Joe’s goods delivered via Prime the next day! You’d never have to deal with their weird and frustrating parking lots again! Or between Aldi Sud and Amazon, because there’s your built-in infrastructure aimed squarely at the income brackets Amazon Prime does not yet dominate.

But the Whole Foods deal rescues a company that’s been floundering in recent years and allows Amazon to acquire a whole host of assets rather than develop them organically.

So what? The Amazon-Whole Foods deal confirms that Amazon’s ambitions have moved beyond e-commerce and into brick-and-mortar means of separating people from their money. Whole Foods broke out as a highly valuable brand because it managed to define groceries as a luxury-level experience available beyond big cities to people who liked to think they’d absolutely patronize Zabar’s in their alternate glam NYC life.

(Or maybe you’d be a Dean & DeLuca person. There’s room for everyone in the alternate fantasy NYC.)

It also helped define experience as an upscale retail component. Just think about the emphasis on service, the high-touch design in the stores, the encouragement of shopper experimentation, the discovery among abundant product samples, and the in-store bars.

Amazon wants the ability to define a retail category and condition shoppers to not only accept a very highly engineered retail experience, but clamor for it. Who better to provide that than the chain that made organic food a luxury signifier?

Also, it’s not going to hurt that the online grocery business is going to swell from 4.3 percent of the U.S. market today to 20 percent by 2025. Amazon can make sure it’s dominating that segment by meshing its new grocery chain and its existing Fresh business in ways that make sense for different customer segments. Logistics has been a weak spot for online grocers. Logistics is not a weak spot for Amazon.

Who cares? I’m going to swerve a little here and ignore how retailers might be freaking out, and focus instead on the tech companies that are likely to get worried: Microsoft and Google.

The three big players in cloud service are AWS (Amazon Web Services), Google Cloud and Microsoft Azure. It’s difficult to do apples-to-apples comparisons because the companies don’t provide the same types of numbers to track the number of customers or total revenue. For example, Microsoft’s Azure is part of the “Intelligent Cloud” division where revenue also includes Office 365, so it’s tough to determine exactly how much of their $15.2 billion run rate in cloud revenue comes from Azure and how much comes from Office 365. However, AWS’s projected $14.2 billion run rate indicates that the cloud business is already pulling very strong money compared to Azure.

(Google, meanwhile, doesn’t even mention how much money they’re making off their cloud business. But since approximately 87 percent of their $24.5 billion in Q1 revenue came from sales, it’s safe to assume whatever they’re making off the cloud is nowhere near AWS money. Yet.)

Synergy Research Group estimates that AWS controls approximately 40 percent of the public cloud market.

(In this case, “public cloud market” is a much shorter way of saying “the cloud services hosted by other firms and actively taking customers.” A private cloud is merely an arrangement of IT services that is available to only one organization; it’s an in-house deal as opposed to outsourcing.)

Anyway, AWS has nearly half the public cloud market to itself, while Google plus Microsoft plus IBM make up another 26 percent.

What does this have to do with buying a grocery chain? We can infer that Whole Foods was attractive for a lot of reasons: 400-plus established physical locations and already-extant grocery infrastructure will help grow Amazon Fresh; an affluent customer base will mesh with the 82 percent of high-income American households who are Amazon Prime subscribers; the merger will increase Amazon’s stake in the growing organic-foods grocery segment, where Walmart has been able to quietly become America’s number one organic food retailer.

But the buy also gives Amazon a whole lot of intellectual capital when it comes to appeasing demanding customers and training them to incorporate new products into their everyday lives. Those skills are easily transferrable to AWS’s team.

Public cloud comparison charts often show that there’s no one clear winner. Different customers have different needs, from storage volume to speed of data access. But all customers are going to want to be treated as if they’re special. Whole Foods made a high art out of priming people to spend, repeatedly, at their stores. Imagine what that know-how can do for IT salespeople trying to push customers from one tier of file storage to another.

I don’t think Google and Microsoft need to worry about the IT focus tomorrow—at least, not unless Amazon makes good on its threat to buy Slack and launch its own suite of office tools—but they should worry about it soon.

The company’s already nailed down successful, scalable practices for supply chains, logistics and IT infrastructure. Now they’re aiming for dominating the customer experience. And customers don’t just buy books or shoes and food. They buy IT services, too.

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With Whole Foods Purchase, Amazon Gets Closer to Mastering the Customer Experience