Amazon and Whole Foods: What's Next? Market Deal: Aisles to Go Before They Sleep -- WSJ

By Laura Stevens Features Dow Jones Newswires

Amazon and Whole Foods need to chart a path forward after their deal; Echo in grocery aisles?

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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 12, 2017).

Amazon.com Inc.'s acquisition of Whole Foods Market Inc. could mean that consumers see Echo and Kindle devices for sale in the grocery aisle and 365 organic foods in Amazon's green delivery totes.

But beyond simple cross-selling opportunities, a big question in the $13.7 billion deal is: How deeply will the online retail giant integrate its new brick-and-mortar subsidiary?

At a town hall meeting at Whole Foods headquarters in Austin, Texas, on June 16, the day Amazon announced its biggest-ever acquisition, executives implied a light touch.

"We have enormous admiration and respect" for the way Whole Foods has built its business, Jeff Wilke, Amazon's CEO of worldwide consumer, said at the time. "And the worst thing that we could do would be to ask you to change it in some discontinuous way."

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Still, Whole Foods Chief Executive John Mackey added, "Things are gonna change. There's just no question about that."

Amazon's options with Whole Foods range from leaving the grocer essentially as a standalone to giving it an overhaul. While the transaction is expected to close this year, Amazon is typically deliberate when it comes to establishing an integration plan, and it could take several months for it to become clear, according to former Amazon employees and people familiar with its acquisition strategy.

So far, Amazon has shed little light on its plans. The deal materialized in approximately six weeks, leaving executives at both companies little time to craft a concrete integration plan, other than to keep Mr. Mackey at Whole Foods' helm. It is likely to try to streamline operations, reduce prices and introduce some Prime membership benefits, the former employees said.

Both Amazon and Whole Foods declined to comment.

The deal poses risks for Amazon.

Change Whole Foods too little, and the company continues to struggle with inefficiencies. Too much change, and it bleeds loyal customers and staff, potentially prolonging a same-store sales decline.

A look back at Amazon's track record shows it is largely hands-off with its acquisitions, except in some cases where it has bought a company for scale or to remove a rival.

Their $1.2 billion acquisition of Zappos in 2009 largely left the online shoe seller autonomous, in part to preserve Zappos' relationship with brands and customers. The two companies established operating guidelines and limited integration to "must-haves."

"We have our own separate culture and way of doing business," said CEO Tony Hsieh, who has been leading Zappos since before the acquisition. "We essentially treat Amazon as the equivalent of our board of directors."

Still, former Amazon executives say some adjustments were made on the back end to increase supply chain efficiency and to reduce costs -- something likely to happen at Whole Foods, too.

Twitch Interactive Inc., which broadcasts people playing videogames, has kept its open floor plan and free cafeteria since Amazon bought the San Francisco-based startup for $970 million in 2014. While the video-streaming service still runs as a standalone, the two companies have joined forces to grow Amazon's Prime membership by creating Twitch Prime, a $10.99 monthly membership that gives Twitch users the same benefits as Amazon Prime along with discounts on games and other perks.

Amazon's Mr. Wilke has publicly touted the overlap in Amazon and Whole Foods customers, and analysts and former executives expect the company to try to fuel Prime membership growth through offering special discounts and services.

Even so, there may be a culture clash.

Whole Foods gives its stores autonomy and has long rewarded employee loyalty, something that may be a tough fit with Amazon's desire for solutions that can apply across the board and a culture that prizes performance over tenure, according to the former employees and people who have worked with both companies.

In other high-profile cases, Amazon did fully integrate its purchases.

In 2012, it acquired Kiva, which makes warehouse robots that can tote shelves full of items to human workers, for $775 million. Buying Kiva improved Amazon's operational efficiency and kept the technology out of rivals' hands.

Amazon "saw it as a very strategic acquisition," said Jerome Dubois, director of global sales at Kiva at the time. He stayed at Amazon through mid-2015 and later became co-founder to robotics company 6 River Systems, Inc.

"I don't think there was any way in the world that they were going to let Kiva run as a standalone," he said.

In 2010, Amazon acquired Quidsi Inc., which owned diapers.com and other websites, after a pricing war between the two online retailers. Amazon paid roughly $550 million, buying some scale and supply chain expertise, such as Quidsi's insights about how to more profitably ship bulky items, such as formula and diapers, and cracking the online subscription model.

The company started off as a standalone brand, too, but Amazon quickly worked to join back-end operations and to pool some inventory. The two faced some culture clashes as a result, and Amazon more fully integrated Quidsi after its co-founders exited. It recently shut down the unit, saying it was unprofitable.

Sarah E. Needleman,

Khadeeja Safdar

and

Heather Haddon

contributed to this article

Write to Laura Stevens at laura.stevens@wsj.com

(END) Dow Jones Newswires

August 12, 2017 02:47 ET (06:47 GMT)