With Whole Foods deal, Amazon doing what it set out to do

After Amazon.com announced last Friday that it would buy Whole Foods Market, no analyst seemed to think it was anything less than a game-changer for anyone else who sells groceries and household products.

"If it wasn't clear before," wrote analysts at Wolfe Research, "it is certainly clear now in our opinion that Amazon intends to take significant market share of the $1 trillion consumables market over the next three to five years."

That's the part of the reaction to the deal that's difficult to really understand. Weren't Amazon's intentions clear enough long before the Whole Foods deal got announced?

At the beginning of last week, executives at companies such as Target ought to have been paying awfully close attention to what Amazon was doing in the grocery business. And on Friday when they learned of the $13.7 billion Whole Foods deal, there should have been no surprise.

They could have been really unhappy about it. But not surprised.

As the execs at Minneapolis-based Target surely understand, Amazon has long been thinking about how to become a major player in the very big category of selling groceries, with that thinking going back maybe 15 years. That's back when most consumers still thought of Amazon as a website for buying books.

That it's recently gotten into operating physical stores should not be shocking, either. As the Taiwan-based strategy writer Ben Thompson pointed out in a terrific post this week, being a top internet retailer hasn't really defined Amazon's ambition for a very long time. Maybe it never has.

Amazon didn't remain exclusively an online bookstore very long, of course, quickly moving on to selling other products. Through the middle of the last decade, at the top of its annual report to the Securities and Exchange Commission, the company described its aspiration as building the top place where anyone can find and discover anything they might want to buy online.

That sure sounds like a big ambition, but nearly 10 years ago the Amazon dream became much larger. It was no longer limited by what it could sell to customers online. That was when Amazon first said it was seeking to be "Earth's most customer-centric company for three primary customer sets: consumer customers, seller customers and developer customers," the latter being the customers of its computing services business.

In the last annual report, that ambition to be the most customer-centric hasn't really changed, it's just expressed with far fewer words. At Amazon that idea seems to come across as an obsession with getting better at delivering what the customer wants, either online, through a self-service kiosk or even in a grocery store.

One big reason to focus on customers, founder and CEO Jeff Bezos wrote in his most recent annual report letter, is that they are always dissatisfied. That's even when customers say they couldn't be happier and business is booming.

Dissatisfied customers are what push innovators to come up with something better. These customers are eager to have their problems solved in new and better ways, even if they were unaware themselves that the old way things were done could have been improved.

An example Bezos offered was the membership-style program Amazon Prime, with better shipping and other benefits for $99 per year. Now more than half of American households are Prime members, a service no Amazon customers had even asked for but sure seemed to want.

Amazon has obviously found providing fresh food a challenge. Earlier this year Bloomberg detailed much of the false-starts and tinkering undertaken by Amazon to bring fresh food to its customers. One of its biggest problems was that it didn't have the advantage of being big in fresh food, with the benefits of scale it enjoyed in other product categories.

Scale has long been a very important part of the Amazon growth story. Building out its technology platform and distribution capability attracted more customers and generated additional sales, in turn justifying spending even more on capital investments. Amazon's sales last year were nearly twice Target's, but it spent more than four times as much on capital investments like new facilities and technology.

Getting to scale at Amazon was made a little easier just by the kind of products Amazon chose to start selling at the beginning. A printed book is the same no matter where it's picked up and can sit awaiting purchase in a warehouse for months.

Then once the website became easy for consumers to use and the picking, packing and shipping capabilities were built, the company could easily sell other products that were a lot like books.

Fresh grocery items like milk and produce can't easily be shipped all over, can vary a lot by location and season and will quickly spoil. The Bloomberg report highlighted some of the problems that have showed up in the Amazon Fresh business, from throwing away a third of the bananas to having customers routinely return moldy strawberries.

What the company really needed was to get big enough in fresh food for it to make sense to build the massive warehousing and other facilities that would make it possible to keep fresh strawberries and milk on hand everywhere.

The day after the Whole Foods Market deal closes later this year, Amazon will have done that. It'll have the Whole Foods distribution network and more than 460 stores — and thus refrigerated distribution capability — near most of its 80 million or so Amazon Prime members.

What changes Amazon intends to make at Whole Foods can't be known, of course, and it's probably safe to assume that Amazon doesn't know yet. Changes are coming for Target too, of course, although the business plan had better not get ripped up just because Amazon will be acquiring Whole Foods. Target couldn't replicate much of what Amazon is doing now if it tried.

But there's one thing Target executives should've learned from watching Bezos build Amazon. That's that the customer, right now, is dissatisfied.

lee.schafer@startribune.com 612-673-4302