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If you don't know how Amazon really operates, I'll bet you have no idea why it bought Whole Foods and what it really plans on doing with it.
Amazon.com Inc. (Nasdaq: AMZN) is going to use Whole Foods the same way it used everything else. Just like it used its original book-selling fulfillment centers to sell everything to everyone, and how it used its Amazon Web Services platform to sell 40% of all cloud-based web services…
To take a piece of any and all economic activity… selling anything and everything.
Now, that includes food.
The Whole Foods acquisition fills in the missing link in Jeff Bezos' grand plan to sell the world to the world and profit from the sale of everything, including books, clothes, food, and anything to do with data.
Here's the real reason Amazon bought Whole Foods and what to expect from it next…
How Amazon Built Its Empire
When Amazon started selling books, it needed a fulfillment center to warehouse the books and be able to ship them directly to online buyers. This would put a direct line into customer's homes and offices, as opposed to having publishers and distributors ship books on Amazon's behalf.
The fulfillment center then became fulfillment centers (plural). The high cost of building massive fulfillment centers is offset by the fact that Amazon is the biggest customer of its fulfillment centers, since it warehouses other sellers' goods shipped through Amazon.
Having transshipment fulfillment centers allows Amazon to handle all the merchandise it sells… Which allows it to take a slice of someone else's profit. It adds in a profit for itself and controls shipping, which gives it direct access to customers.
If Amazon didn't have its giant fulfillment centers, it couldn't take a piece of everything that passes through its hands. It couldn't take the profits it generates as a transshipper and make its own products that compete with both products sold through Amazon and products sold elsewhere.
By forming a trusted customer relationship (predicated on ease of shopping and competitive pricing and enhanced by Prime membership status), Amazon offers an extraordinary number of goods and services. To the great satisfaction of its customers, Amazon offers almost everything from entertainment to its own manufactured goods, all for sale and delivery in short order.
That's how Amazon created the relationship it has with its members and customers; it leveraged fulfillment centers to scale up the ultimate customer-centric selling platform.
Amazon does the same thing with AWS, Amazon Web Services.
Building the largest cloud services platform in the world is massively expensive. But again, Amazon's huge fixed costs building AWS are offset by a lock on AWS' first and best customer, Amazon itself.
Now, with its reach, scale, and masterfully curated relationship with developers who build services on AWS, Amazon is in a position to take a toll on quadrillions of bytes of data collection, storage, computation, and transmission.
Starting to recognize a pattern?
That brings us to Whole Foods.
Our Inevitably Amazon-Branded Future
Grocery sales are the largest segment of consumer spending in the United States, accounting for 20% of all sales
While Amazon's waded into the "groceries" space, it lacked a leverageable fulcrum to create scale.
It gets just that with the purchase of Whole Foods for $13.7 billion.
With 457 stores in North America, Whole Foods gives Amazon an established foothold in the upscale retail store side of the healthy-food grocery business. But, far more importantly, Whole Foods gives Amazon 457 stocked and refrigerated fulfillment centers.
Buying all those fulfillment centers – which are already associated with quality, healthy groceries – is the leverage point Amazon's been missing to scale grocery sales.
It's that simple. But it's only the beginning.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.