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Why did Amazon buy Whole Foods? To beat Walmart in the war for the on-demand grocery shopper.

As announced June 16, Amazon and Whole Foods have agreed that Amazon will acquire Whole Foods Market for $42 per share in an all-cash transaction valued at approximately $13.7 billion. Whole Foods will operate under its own name. The acquisition will give Amazon ownership of 460 stores in the United States, Canada, and the United Kingdom as well as Whole Food’s built-in ecosystems of customers and suppliers.

Amazon’s expansion into brick-and-mortar grocery industry is well known (as is the company’s general encroachment into offline retail.) To date, Amazon’s strategy has been to build and pilot its own stores. So why would Amazon buy a chain of grocery stores rather than develop its own? I believe Walmart is forcing Amazon to accelerate its expansion.

Chronology of a Retail War

As I have blogged, Amazon and Walmart are in an intense fight to own the future of retail, including the $600 billion grocery industry. Both businesses are racing to win loyalty from the on-demand consumer who expects a frictionless buying experience both online and in the store:

• Amazon has been piloting its own models for using physical stores to provide on-demand grocery services, examples being the launch of Amazon Go and Amazon Fresh Pickup. Amazon Go is supposed to provide a completely frictionless buying experience via physical self-service grocery stores where anyone with an Amazon account, a supported smartphone, and the Amazon Go app can simply take what they want from the store and leave with no check-out required. With AmazonFresh Pickup, customers can order groceries online and have their orders ready for pick-up at designated AmazonFresh Pickup physical locations — in as little as 15 minutes.

• Walmart has been making moves of its own, some of which are aimed directly at the grocery-buying experience. In 2015 the company launched Walmart Pay, which shoppers use on their mobile devices to purchase goods in-store. In 2016, Walmart’s began piloting Pickup and Fuel concept stores, where customers order online and then drive to Walmart to have their groceries loaded into their cars by employees. These developments have occurred in context of Walmart developing a stronger way to battle Amazon by developing its own ecommerce business and to gain more efficiency through its offline infrastructure. For instance, in 2016, Walmart purchased hot ecommerce company Jet.com. In 2017, Walmart announced it has been testing a service whereby Walmart employees deliver packages to customers on their way home, which raises the possibility that employees could also deliver groceries.

Both Amazon and Walmart are in a strong position to win the war for the future of retailing. They both have brand muscle and deep pockets. Amazon is killing Walmart (and everyone else) in online retailing, and Amazon is successfully moving into our homes and cars with on-demand devices and technologies such as the Dash button and Alexa voice assistant, which make Amazon a more ubiquitous and convenient presence in our lives.

Walmart possesses many strengths, too, including scale and a powerful physical ecosystem that includes not only its stores but network of partners, over whom Walmart wields considerable power. Walmart also knows how to experiment, learn, and leverage its scale. For example, after launching Walmart Pay in 2015, Walmart quickly expanded Walmart Pay across 4,600 stores. Walmart has also added services to Walmart Pay that cater to the needs of on-demand consumers, such as the ability for shoppers to refill prescriptions and skip pharmacy lines. Walmart understands the intersection of the mobile and physical worlds – and has the power to act on its understanding.

Whole Foods Gives Amazon an On-Demand Ecosystem

Buying Whole Foods gives Amazon:

• A pre-built infrastructure and customer base to accelerate on-demand services such as in-store pick-up and delivery — possibly even a way to develop the Amazon Go model without needing to build new stores. So far, the Amazon Go frictionless shopping experience has encountered glitches as the in-store technology struggles to keep pace with consumer foot traffic when the Amazon Go store gets busy. Amazon has delayed the launch of a public-ready Amazon Go. Whole Foods give Amazon an intriguing way to roll out the model once Amazon works out the kinks in the system.

• An affluent customer base to cross-promote Amazon services and products such as its Echo voice-activated smart speaker in an offline environment. Moreover, Amazon can conceivably build upon its already popular Echo speaker to offer voice-activated ordering capabilities via Whole Foods.

And don’t underestimate the role of Echo. Echo customers are using the device to do a wide variety of tasks such as playing music and checking the news. Integrating Echo with the offline shopping remains unconquered territory for Amazon – but not for long, I suspect. Businesses such as Domino’s Pizza have activated product ordering via the Echo, giving us a glimpse of the future of online/offline commerce. Amazon wants to own that future.

Why the On-Demand Consumer Matters

Amazon and Walmart have good reason to fight for the on-demand consumer. The rise of the on-demand consumer is one of the compelling trends defining the 21st Century economy. As Google has reported, we’re living in the era of the micro-moment, when consumers, armed with mobile devices and apps, can research and purchase goods and services on their own time and terms. Businesses ranging from Panera Bread to 7-Eleven have responded to the on-demand consumer with services such as online ordering and drone delivery.

The grocery industry is well suited to an on-demand model. People need to restock groceries often, and obviously perishable goods have a limited shelf life. But as writer Mark Rogowksy notes in Forbes, the on-demand grocery model has been fraught with its share of failure, one of the reasons being that grocery delivery is not as “on-demand” as it sounds. In fact, it’s a lot easier for mobile consumers to order and pick up groceries on the go rather than wait around in their homes for delivery. So grocers need a way to accommodate shoppers on the go, which is where physical stores (such as Walmart and Whole Foods) come into play.

Buying Whole Foods gives Amazon a way to exert its will on the on-demand economy. Your move, Walmart.