Amazon bought Whole Foods five years ago for $13.7 billion. Here’s what’s changed at the high-end grocer

Five years ago, Amazon closed its $13.7 billion purchase of Whole Foods, by far the biggest acquisition ever for the e-commerce and cloud computing giant. Since then, Amazon has made a lot of changes to the specialty grocer, from lowering prices to embedding checkout technology in its 500-plus U.S. stores.

Amazon has opened 60 new locations, including one “dark store” entirely devoted to filling online orders. Yet Whole Foods still controls just over 1% of the grocery market, according to research firm Numerator, compared with Walmart’s 19% and Kroger’s 9%.

Next week, Whole Foods gets a new CEO for the first time since its founding in 1980. Operating chief Jason Buechel steps into the lead role on Sept. 1, succeeding colorful, polarizing co-founder John Mackey, who was once described as a “right-wing hippie.”

“When you have the kind of culture clash that I imagined John Mackey and Amazon had, it’s really impressive that John stayed around in a leadership position as long as he did,” said Jason Goldberg, chief commerce strategy officer at advertising firm Publicis. “It surprised me.”

Buechel takes over at a pivotal time for Amazon, which is jumping deeper into the world of in-person retail, with a focus on groceries. Revenue at its physical stores climbed 12% in the second quarter, while online sales dropped. That marks a change from the prior few years, when Amazon’s physical stores lagged the overall retail business. Outside of the food business, Amazon recently shut 68 stores, including all Amazon Books, 4-star and Pop Up shops.

Here are some of the key differences in the Whole Foods of today from the company that Amazon acquired in 2017.

On the corporate side, Amazon centralized some operations, moving them from individual stores to Whole Foods’ Austin, Texas, headquarters. But it hasn’t become a conventional supermarket like some predicted. Whole Foods says rather than swapping out regional suppliers for bigger names, the company has added 3,000 local brands in the past five years, a 30% increase since before the Amazon deal. 

Each region has teams of full-time “foragers,” who look for new local products. Whole Foods says the model gives flexibility for smaller brands to remain in a few stores instead of having to supply products companywide. Amazon uses its data tools to help determine what brands get sold in what stores.

“Going into a Cupertino store is a very different experience, versus walking into a Los Altos or Los Gatos store in the same Northern California region,” said Guru Hariharan, a former Amazon software development manager who now runs e-commerce management company CommerceIQ. “They’re probably doing a better job because of the personalization algorithms.”

There’s also a new accelerator program for local producers to earn a spot on the shelves of local stores, and certified training programs to turn hundreds of Whole Foods workers into accredited cheesemongers and butchers. While some of the hot food bars, free samples and specialty chef counters went away during the Covid pandemic, Whole Foods says they’re back.

As it scales up, Whole Foods insists it’s committed to keeping products local and clean. Since the Amazon deal, Whole Foods told CNBC it’s more than doubled its list of banned food ingredients, bringing the total to more than 250. It prohibits things like hydrogenated fats, high fructose corn syrup and artificial sweeteners, and meat must be free of antibiotics and added hormones.

Whole Foods said it’s also enhanced the standards for canned tuna, eggs and chicken. In 2019, it banned plastic straws and minimized other plastics by introducing new types of produce bags and rotisserie chicken containers.

Changes have come quickly, but the transition hasn’t all been smooth for Whole Foods’ workforce.

A year after the purchase, a group of Whole Foods staffers emailed thousands of fellow workers with a list of takeover-related grievances, including the removal of some stock options and “constantly being asked to do more with less resources and now with less compensation.” Some workers tried to unionize under the large Retail, Wholesale and Department Store Union, but those efforts have stalled.

For shoppers, the most visible change to stores is the technology inside the doors.

Customers can now enroll their palm print with Amazon One to pay without a card or phone. A device scans your palm, triggering a charge to your Amazon account. It’s available at more than 20 Whole Foods locations, with 65 more stores in California coming onboard soon.

Privacy advocates are speaking up.

“When you start using biometrics for payment, people, rightly so, are concerned about that and how those biometrics are being used,” Goldberg said.

Amazon is also selling the palm-scanning tech to other retailers and event venues. But in March, one customer — Denver’s Red Rocks Amphitheatre — backed out of a deal after activist groups and musicians like Rage Against the Machine voiced concerns that Amazon would share palm prints with government agencies.

At Whole Foods, the palm-scanning devices are a key part of another tech solution that allows checkout-free shopping. Amazon has launched Just Walk Out at two Whole Foods so far, one in Washington, D.C., and one in Los Angeles. 

Amazon wouldn’t give CNBC an official tour, so we tested the Washington store on our own. Hundreds of cameras watched our every move. An associate said almost everything was being weighed by hidden scales that can identify the moment something as light as a bag of potato chips leaves the shelf. 

We exited smoothly through the Just Walk Out turnstiles, paying with a palm scan. But the receipt we received by email hours later wasn’t accurate and missed several items, most likely because we’d briefly left the highly monitored part of the store.

“The first version of any of these things, that kind of day one experience as Amazon likes to call it, are always going to be imperfect and have the potential to put customers off if it’s really bad enough,” Goldberg said.

Amazon told CNBC that Just Walk Out is “highly accurate” and that customers have 30 days to request a refund if there’s a discrepancy on the digital receipt. In terms of privacy concerns and whether the company is selling personal data to consumer goods companies, Amazon said any sensitive information is treated in accordance with its long-standing policies, including only sharing aggregate, anonymized insights with brands. 

The privacy issue has gained resonance of late as Amazon has expanded its data collection mechanisms. In addition to millions of online shoppers, there are Alexa devices, Ring doorbell cameras and soon room-mapping robot vacuums.

“It’s very rare that a grocer also has these incredible digital technology offerings that can help it get through more difficult periods,” said Ethan Chernofsky, lead data analyst at Placer.ai, a location analytics company. “There is a feeling that with their technology expertise, they can identify elements of scale and profit maximization that maybe others can’t.”

One of Amazon’s competitors in the autonomous retail space is AiFi, which has its computer vision system installed in 84 stores, including Aldi in Europe, concession stands at the Detroit Lions stadium, 50 of Poland’s largest convenience stores and gas station mini-marts in California. Instead of scaring customers, AiFi’s chief technology officer, Joao Diogo Falcao, said it drives them to buy more.

“There’s anecdotal evidence that says that you buy more products because you never look at your wallet,” Falcao said. “We’ve seen 20% basket increases when the store has been running for a while. We also see that with enough adoption, with enough marketing, you have clients come in and then it’s a sticky technology. They like it, so they come back.”

Amazon has another experiment in removing the checkout bottleneck that doesn’t use computer vision or biometrics. The Dash Cart tracks and tallies items as shoppers place them in the cart. The carts are currently limited to a very small amount of groceries and can’t go to the parking lot to be unloaded. The Dash Cart is soon coming to its first Whole Foods in Westford, Massachusetts. 

Amazon’s commitment to low prices didn’t align with Whole Foods’ image at the time of the acquisition, when the grocer was often called “whole paycheck” and mocked for selling $6 asparagus-infused water.

An Amazon spokesperson told CNBC in a statement that its goal was to “make high quality, organic foods more affordable and accessible for everyone,” and that it’s since “lowered prices across aisles at Whole Foods Market, offered Prime Membership Discounts and Prime Member Deals in-stores.”

Amazon also started focusing on selling products with bigger profit margins, an especially difficult task in the grocery business.

“You sell a lot of dollar bananas that you pay 99 cents,” said Goldberg. “So you have to be really efficient to make money. And the vast majority or a good chunk of the things you sell are perishable.”

One way to boost margins is to sell private-label goods, or in-house products. At Whole Foods, the 365 private label got a brand refresh in 2020. Whole Foods says it added 295 new products to the 365 line last year, bringing the total number to 2,200 today.

“What Amazon has been slowly starting to do is replace a lot of the purchases in Whole Foods with this private-label brand, and that has allowed them to bring prices down,” Hariharan said.

Amazon has at least 111 private-label brands, according to Coresight Research. They include Amazon Basics and Solimo for household goods and Amazon Essentials for clothes. Amazon has also been accused of using its data prowess to give its in-house products an unfair advantage.

Online grocery orders are another key area for Amazon. Whole Foods told CNBC it delivered three times as many online orders in 2020, the year the pandemic hit, as in 2019. 

“Orders are shifting online, but they’re generally not profitable,” Goldberg said. “Every grocer in America is interested in digital grocery. They’re trying to capture that digital grocery customer, but they’re also trying to figure out how to make it more profitable.”

For Whole Foods, that means expansion, because closer proximity to customers equates to more affordable delivery. Whole Foods says its 533 global stores can now serve more than 170 million customers in the U.S., Canada and the U.K.

Whole Foods also built a so-called dark store in Brooklyn, New York. It’s closed to customers and is completely dedicated to preparing delivery orders. Goldberg says Walmart, Albertsons and Kroger are experimenting with the concept as well, bringing in robots to pick orders and cutting back on labor costs.

“Competing with professional shoppers is moving up on the frustration scale for many, many consumers,” Goldberg said. “That’s part of the reason that some retailers have experimented with either dark stores or fulfillment centers.”

Instacart used to have an exclusive deal to fill Whole Foods online orders, but that came to an end the year after Amazon took over. Now, Amazon has transitioned the majority of those gig workers to official Whole Foods employees. Other employees are in charge of monitoring a part of the store where Amazon online customers can pick up packages and drop off returns, often without a box.

The success of the Whole Foods acquisition is difficult to measure because Amazon rolls its sales into the physical stores category, alongside its 60 Amazon Fresh grocery stores, an Amazon Style clothing store and 25 smaller Amazon Go stores. But Whole Foods is by far the biggest individual contributor in the group.

Earlier this year, things looked a little bleak. Days after Amazon missed estimates for its first-quarter earnings results, the company announced the closure of six Whole Foods stores.

As consumers get back into the habit of shopping in person, Whole Foods is showing signs of recovery. Placer.ai found the number of visits people make to Whole Foods is now hovering at about the same level as July 2017, before Amazon took over.

“Since the start of the pandemic, Whole Foods was one of the harder-hit groceries and its recovery trend has been less strong than others,” Chernofsky said. As for the six Whole Foods closures, he added, “It really is right-sizing, and it’s a push towards optimization.”

Since the other retail closures in April, Amazon has opened seven new Amazon Fresh stores, a more mainstream grocer with 41 stores in the U.S. and 19 in the U.K. Whole Foods also told CNBC it’s adding 50 new stores in fast-growing regions soon. 

“You have the potential for this three-pronged approach to attack grocery, which is Amazon Go as this perfect urban quick in-and-out opportunity, then Amazon Fresh as convenience value-oriented, going into the suburbs and in some urban areas as well,” said Chernofsky, adding that Whole Foods will likely remain a more high-end grocer. “That mix could be incredibly potent.”