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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 boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.