A year after Amazon announced its acquisition of Whole Foods, here's where we stand

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A year after Amazon announced its acquisition of Whole Foods, here's where we stand

It's been a year since Amazon bought Whole Foods. At the time of the deal, which came as the grocer was under pressure from activist investor Jana Partners, Whole Foods was struggling.

It had been first to the specialty and organic game, but as larger competitors also moved into the space, it was ceding ground. With scale and better infrastructure, these retailers could offer many of the same products at a better price. Whole Foods was behind its competitors in technology and developing a loyalty program.

Its challenges showed through in its finances. In 2017, before its sale to Amazon, same-store sales were declining 1.5 percent, according to regulatory filings. The previous year, they were declining 2.5 percent.

The deal between the two — which was at one point known as Project Athena — came together under intense secrecy, after Whole Foods CEO John Mackey reached out to Amazon CEO Jeff Bezos through an industry consultant. Amazon told Whole Foods if word of the deal leaked, it would call it off.

A year later, here's where we are.

Whole Foods stores look different

Whole Foods gave Amazon the brick-and-mortar platform that many internet retailers have begun to realize is essential to minimizing the costs of returns, delivery and marketing — not that Amazon needs much of the latter.

Already, Amazon has begun to sell its devices like Echo in stores and opened up lockers for delivery in certain Whole Foods locations. In some stores, there are now signs for special discounts for Amazon Prime members. Eventually, those discounts will be national. Whole Foods has also begun to offer free delivery for Prime members.

As Amazon continues to centralize its merchandising (more on that later), there may be fewer employees in its stores.

Retail consultant Matt Bailey (left) helps customer Geoff Witherspoon at the Amazon Pop-Up in the Union Station Whole Foods on Thursday, March 22, 2018.
AAron Ontiveroz | The Denver Post | Getty Images
Retail consultant Matt Bailey (left) helps customer Geoff Witherspoon at the Amazon Pop-Up in the Union Station Whole Foods on Thursday, March 22, 2018.

It's going from regional to national

One of Whole Foods' biggest challenges has been taking what set it apart — lots of niche and often regional products — and streamlining that into becoming a cost-efficient, national retailer. Many small brands point to Whole Foods as the birth ground for their new products. For Whole Foods though, devoting shelf space to small brands, especially those that aren't driving traffic, was not always good for the bottom line. Dealing with each brand on a regional basis could prove complex.

Whole Foods has been trying to solve that challenge since before its sale to Amazon, hiring Target's Don Clark in 2015 to help with the efforts. The grocer's sale to Amazon though came with its own set of uncertainties, which resulted in those moves being viewed with a different level of scrutiny and tension.

It has begun to centralize purchasing for its suppliers. That means many small brands need to go through WFM headquarters in Austin, Texas, to get placed in a store, not through their regional Whole Foods representative. That approach simplifies operations and makes it easier for a brand to scale without traveling region by region. The drawback is small brands with little plans to grow at such a scale might feel squeezed out.

Whole Foods has also begun to centralize its merchandising, which means it's now taking care of in-store displays and setup — rather than allowing brands to outsource the task to third-party services.

An employee stocks yogurt for sale on the opening day of the 365 by Whole Foods Market store in the Silver Lake neighborhood of Los Angeles, California
Patrick T. Fallon | Bloomberg | Getty Images
An employee stocks yogurt for sale on the opening day of the 365 by Whole Foods Market store in the Silver Lake neighborhood of Los Angeles, California

Amazon has found a treasure trove of data

It's beginning to become more clear why Amazon bought Whole Foods. For one, it's getting its hands on lots of shopping data, which will come in handy as Amazon expands its online grocery business and private label offerings.

As Amazon combines its Prime service and Whole Foods shopping experience, it's getting even more insight into how the same person shops on and offline. That means a better ability to target ads and promotions than a grocer typically is able to. Because many shoppers still browse groceries online but shop in person, this combination threatens to be particularly powerful.

Customers register for the 365 Rewards discount program during the grand opening of a Whole Foods Market 365 location in Santa Monica, California.
Patrick T. Fallon | Bloomberg | Getty Images
Customers register for the 365 Rewards discount program during the grand opening of a Whole Foods Market 365 location in Santa Monica, California.

It's also begun to tackle the challenge of fresh food delivery ... again

Through Whole Foods stores, Amazon has renewed efforts to deliver fresh food — a service that has been a struggle for it in the past. Unlike shampoo or paper towels, fresh food can spoil quickly. It is costly and complicated to deliver. It is expensive to store. Those challenges plagued its efforts with prior delivery service, Amazon Fresh.

Whole Foods' stores provide a more cost-effective way to take care of fresh food, while also providing a launching pad to transport those groceries.

Shoppers are more likely to order and trust fresh food and meat from a retailer branded Whole Foods than they are from one named Amazon.

An employee loads bags of groceries into a customer's vehicle at an AmazonFresh Pickup location in Seattle, Washington.
David Ryder | Bloomberg | Getty Images
An employee loads bags of groceries into a customer's vehicle at an AmazonFresh Pickup location in Seattle, Washington.

The sleepy retail industry has woken up

Things are changing outside of Whole Foods, too. The industry is not only scared by the marriage of Whole Foods and Amazon, it is also now facing the infiltration of European competitors Aldi and Lidl, discount grocers that are attacking traditional grocery stores on price.

Kroger's stock dropped from $31 to $22 a share when the Whole Foods deal was announced. It now trades at $24, a level that many industry sources say represents a new normal.

In the past year, grocery stores have slowed their new store growth and instead focused on acquisitions of technology or platforms. Walmart bought Indian e-commerce company Flipkart, Target bought delivery service Shipt, Kroger invested in British online supermarket Ocado and bought meal kit company Home Chef, and Albertsons also bought a meal kit company, Plated.

Still, these retailers are at a disadvantage when it comes to technology investments. Unlike Amazon's shareholders, investors in retail companies punish retailers when their investments are unprofitable or take longer to pan out.

Retailers are also increasingly focused on fresh food, prepared food and even restaurants to draw shoppers to their stores. There's a big push for private label brands, which are more profitable for the stores.

Organic and specialty products, the space where Whole Foods made its name, remains a big focus for the industry. As they give those brands more and more shelf space, new companies no longer view Whole Foods as the singular place to launch. They are looking to other grocers like Target, Costco and Walmart.

For smaller grocers, these changes could mean trouble and an uncertain future. Many don't have the funds to invest in technology and capabilities as their larger competitors. They also can't rely on those retailers as an escape clause anymore. It used to be when life as a grocery store got too hard — or when control of a family-owned grocery store shifted to a new generation — they would call up one of the main consolidators, Kroger or Albertsons. Now, those grocers have shifted focus elsewhere, and the price they are willing to pay for a deal is far less.

Walmart CEO Doug McMillon (R) speaking next to Flipkart co-founder and CEO Binny Bansal at an event in Bangalore, as a deal was announced for Walmart to buy a stake in Flipkart. - US retail behemoth Walmart will buy a 77 percent stake in Indian e-commerce giant Flipkart for $16 billion, Walmart said in a statement May 9.
AFP | Getty Images
Walmart CEO Doug McMillon (R) speaking next to Flipkart co-founder and CEO Binny Bansal at an event in Bangalore, as a deal was announced for Walmart to buy a stake in Flipkart. - US retail behemoth Walmart will buy a 77 percent stake in Indian e-commerce giant Flipkart for $16 billion, Walmart said in a statement May 9.

Big Food is getting crushed

As the grocers react, food companies also have been affected. Emphasis on private label, fresh food and specialty food takes shelf-space away from the country's largest packaged foods companies. And the focus on price means margins are being squeezed. Meantime, if Amazon's acquisition of Whole Foods expedites the shift to online grocery shopping, that means a new frontier for consumer giants. They will need to fight for eyeballs and learn new tricks to prompt impulse purchases.

Other factors are also challenging Big Food — like rising costs, upstart competitors and a generation distrustful of all large brands. It's been a tough year for them.

Many, including General Mills, Hershey and Campbell, are reacting by making large, expensive deals. It's too soon to say whether this strategy will save them, but the stakes are high.

Customers shop near a display of General Mills Cheerios cereal at a Costco Wholesale store in Louisville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images
Customers shop near a display of General Mills Cheerios cereal at a Costco Wholesale store in Louisville, Kentucky.

Four things we still don't know

The percentage of grocery shopping done online is small. How much larger will it get?

Whole Foods relies on United Natural Foods for its distribution. Amazon could either renew that contract or attempt distribution on its own when it expires. If it doesn't renew the contract, UNFI would lose a significant portion of its business and scale. The broader food distribution industry is already under pressure, a reverberation from the pressures (and bankruptcies) within the grocery sector.

Whole Foods used Instacart before the Amazon deal and continues to do so, what does this relationship mean now that Amazon is pushing its own delivery service? Instacart has been lining up retail partners left and right, implying it's preparing itself should Whole Foods cut ties.

Whole Foods footprint is also far smaller than its largest grocery competitors, but is it big enough for Amazon to accomplish all it wants within the grocery space? There is often speculation about Amazon doing another large deal to augment its footprint. Observers note, though, that doing so would thrust Amazon into regulatory scrutiny, and there have already been dust-ups between President Donald Trump and the Seattle giant.

InstaCart employees fulfill orders for delivery at a Whole Foods Market store in Los Angeles.
Patrick T. Fallon | Bloomberg | Getty Images
InstaCart employees fulfill orders for delivery at a Whole Foods Market store in Los Angeles.