Amazon’s Acquisition Game

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\"\"Let’s be clear once and for all—Jeff Bezos doesn’t care if he sells you broccoli or ball gowns. Therein lies Amazon’s greatest strength and the potential chink in its digital armor.

This strategy of being the “everything store” will be the guiding principle behind the company’s search for additional acquisitions in its quest to become a vertical retailing monopoly.

The only question everyone is pondering—or brooding about—is who’s next? Some industry observers believe another major brick and mortar buyout won’t happen until Whole Foods is fully integrated, or ingested, into the Amazon ecosystem.

Shopping Around

But the company is actively looking and the list of potentials gets longer every day. Some of the names include: Dollar General, Nordstrom, Restoration Hardware and Williams Sonoma. Even Sears, which is getting closer to the boneyard, has been mentioned as a potential, and relatively cheap, acquisition. However, Amazon’s not looking for cheap buys or turnaround situations if the acquiree doesn’t have a strong brand image or value as a distribution or fulfillment center.

Maybe they’d be interested in BJ’s Wholesale, whose membership model is close to Amazon Prime. How about a food delivery company like Grubhub, giving Amazon access to a network of more than 50,000 restaurants.

Recently, the company is said to have had talks with a furniture retailer and a number of sources believe the company is still interested in this segment as well as appliances —industries which are notoriously difficult to shop and whose reputation for customer service is somewhere between bad and nonexistent.

Meanwhile, the company is building up its own infrastructure by launching a meal kit delivery service under the Amazon brand in selected marketing areas, thereby filling a gap in the netherworld between food retailing and foodservice.

Non-Linear Thinking

The unvarnished truth is that no one really knows what’s on Amazon’s mind or in which direction it will go. In fact, the retail industry’s failure to keep pace is that no one thinks like Jeff Bezos and his minions.

Amazon hasn’t disrupted entire industries because of what they sell or even its prices. It’s a common misconception that they always have the cheapest prices around. Their gift, if you will, is that their thinking is non-linear and therefore not obvious to an industry like retail that (no disrespect) rarely thinks in complex terms. Basically, Amazon is up for anything that broadens its reach.

The Whole Foods purchase is something of a test to see how well they can ingest another company successfully. But the bottom line is that Amazon needs to make acquisitions to make its model work financially. The company spends an enormous amount of money on distribution—some say an unhealthy amount—and Whole Foods is only the beginning of a brick and mortar infrastructure that will enable it to consolidate consumer shipments and act as a pickup point for Amazon parcels. The retail stores themselves are secondary to their value as fulfillment centers.

Riding the Trojan Horse

But Amazon’s acquisition trail isn’t about real estate. They will be data plays. Every time a customer walks into a supermarket, they buy products across a wide spectrum of categories—not just food. It gives Amazon insights into, and access to, the lifestyles of individuals and families. And Amazon’s expertise in analyzing data will bring target marketing and personalization of the shopping experience to levels never before seen.

In this respect, Whole Foods is the ultimate Trojan Horse for getting to know people’s habits, and lifestyles. This being the case, Amazon could conceivably use food as a loss leader to sell the pricier goods in its stable.

Amazon has a history of aggressively driving down prices. Just ask the booksellers if you don’t believe me. And if you sell a product at a loss long-term in order to get a foothold in any category guess what happens! Someone’s going to be put out of business. Dollars to doughnuts it won’t be Amazon. Their strategy in any acquisition will be to cut operating costs so it can lower prices and get more customers—and the wealth of data that comes with them. Lower prices mean lower margins initially but Amazon is always willing to trade this for better traction in any category.

Dynamic Pricing

Additionally, Amazon could bring strategic or dynamic pricing to future acquirees , something that has eluded traditional retailers. The price sticker that John Wanamaker introduced over a century ago is seen by many as an inequitable strategy and there’s no doubt that Amazon would like to eliminate standardized pricing.

As one retail observer told me: “Why should customers pay the same for fresh food in the afternoon or evening when it’s not as fresh as it was in the morning and why should a customer who buys from one store religiously pay the same price as the customer who doesn’t?” If this doesn’t sound like disruption on a massive scale I don’t know what does! Clearly, this could have a devastating effect on mid-market players that compete largely on price and haven’t carved out any distinct customer experience.

However, under the best of circumstances, acquisitions can be difficult beasts to tame. One of the trickiest hurdles to overcome—and one which has put the kibosh on many a merger—is cultural differences leading to leadership squabbles.

The United States Congress seems to be the classic example of this epic failure. But Amazon also needs to test its ability to assimilate others. Some say they already did that with the purchase of Zappos’s, and Twitch. But those companies were startups and shared similar philosophies and experiences. If you’ll pardon a disturbing analogy it’s like marrying your sister.
Brick and mortar companies generally inhabit old, staid industries with incumbent managements that resist change. Some observers are taking bets on how long before Bezos and John Mackey bump heads. Despite the claim of “love at first sight,” the smart money is on them holding hands until after the transition is complete. At that point the relationship will wear thin pretty quickly, according to industry oddsmakers.

There’s also the question of what Amazon will make acquired companies sell. Would a Nordstrom have to make room for HDMI cables and coffee table books? Should Restoration Hardware stock Craftsman drills? Or, would retailers be forced to make room for pop-up stores with Amazon labeled products?

New-Age Monopoly?

On another front, some serious questions are being raised about the legal and regulatory impact of Amazon’s merger and acquisition activity. This company has become one of the engines that drive the U.S. economy and some are asking whether antitrust scrutiny should be bumped up as Amazon creates a new-age vertical monopoly.

Some factions probably said the same thing about Walmart a few years ago. In the interim, Amazon has become the biggest online bookseller, diaper and comic book store, the largest purveyor of 3-D shoe fitting technology and a raft of database and internet software companies. It sells more than six times as much online as Walmart, Target, Best Buy, Nordstrom, Home Depot, Macys Kohls and Costco combined. On top of that the $12 billion Amazon Web Services division rents servers and computing power to companies like Netflix, Tumblr, Pinterest and even the federal government.

Recently there have been rumblings that Amazon might be in for some antitrust problems. Given Amazon’s diverse power, it’s unlikely anything will happen.
In the end, what may hurt retailers the most is a distinct aversion to innovation bordering on paranoia. What’s been done in much of retail—especially supermarkets—is largely window dressing. We’re talking about an industry that took a decade or more to fully adopt scanning and UPC codes largely because they didn’t want to spend the money. This attitude is not just shooting yourself in the foot but in this age, taking a bullet to the brain.



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