Here’s the one glaring problem with the Amazon-Whole Foods deal

Craig Crossland

Amazon CEO Jeff Bezos, has done it again. Just when we were wondering if he’d decided to adopt a slightly lower profile for a while, he announces what is by far Amazon’s largest acquisition to date, a $13.7 billion-dollar deal to buy Whole Foods Markets. And, all credit to him, the initial media response almost couldn’t be more positive. The markets love the deal (share prices of both Amazon and Whole Foods rose following the announcement, while the market value of competitor retailers fell), and commentators have praised Amazon’s increased potential to expand beyond online retailing.

I’m reluctant to pour cold water on this bonfire of enthusiasm, but, frankly, I’m not sure this acquisition is going to be as successful as many seem to think. Here’s why. One of the key lessons from decades of academic research on mergers and acquisitions (apart from the little-known fact that deals tend to fail at least as often as they succeed) is that related diversification tends to outperform unrelated diversification. In other words, corporations with multiple business units tend to do better when the corporation can add clear value to the individual businesses and vice versa. For instance, think about the value provided by Disney’s animated characters to a range of businesses that it owns, from films to hotels to cruise ships. Alternatively consider the overlap in customers, marketing, and distribution channels for Proctor & Gamble’s beauty care, family care, and personal care businesses.

The problem here, as I see it, is that the resources and capabilities that make Amazon such an exceptionally effective competitor are quite distinct from the resources and capabilities that Whole Foods has focused on and developed over a long period of time. As part of a class in strategic management that I teach here at the University of Notre Dame, we compare and contrast two retail businesses with substantially different modes of operation – Whole Foods and Aldi. Whole Foods operates by pursuing a differentiation-based competitive advantage; through ongoing investments in marketing, brand value, customer service, quality, and in-store experience, it targets a particular socio-economic group of customers, attempts to increase those customers’ willingness to pay above that of its competitors, and thereby exceed the extra costs incurred in creating this increased willingness to pay.

In contrast, Aldi pursues a cost-based competitive advantage. Its value proposition is to provide acceptable-quality goods, most of which are private-label, at the lowest possible price, with no frills, minimal advertising, and a utilitarian in-store experience. Aldi’s focus is driving costs out of its system at every point in the value chain, because the basis of its success is providing roughly the same stuff as its competitors, usually at a lower price. Simply looking at these two descriptions, which one sounds more like Amazon? Clearly, Aldi. In fact, Amazon is probably the poster child for a company pursuing a cost-based competitive advantage.

And it’s not just cold and impersonal strategy, but warm corporate culture that could hardly be less similar. Amazon’s is a culture of relentless, largely impersonal, efficiency, while Whole Foods has positioned itself as an organization that not only provides healthier, natural food, but also represents “enlightened” values. Consider some of the lines in a recent commercial for Whole Foods: “We are hungrier for better than we ever realized,” “It’s good for us and for the greater good, too,” and “This is where values matter.” Take a quick look at the About Amazon section on the company’s website, and see if you get the same sense.

Read Crossland’s entire commentary on the CNBC website.