Amazon–Whole Foods Deal: What It Means for Farmers

“We are what we eat” needs to be taken literally when analysing Amazon’s acquisition of Whole Foods. A lot has been said about how this combination could impact, or even disrupt, the food and retail industries. But although there hasn’t been a lot of focus on how this deal will impact farming, we believe that farming will also be impacted, as consumers find it easier to buy food products that are produced organically, without GMO, or without the use of Antibiotic Growth Promoters (AGP).

picture of fresh grocery delivery

Momentum for niche products

As the market for these more niche products is likely to get additional momentum through this deal, the question arises whether there is sufficient supply of product. In the short term, demand should be carefully managed using consumer pricing strategies to avoid stress in the supply chain. This shouldn’t be too much of a problem for Amazon as they know/learn—through their ‘consumer behaviour algorithms’—better than anybody else what the price elasticity of these niche products is.

Choosing between volume and value

In the longer term however, we believe that substantial growth of agricultural products that are produced using more environmentally friendly farm operations and/or with an increased focus on animal welfare is possible. Even without sacrificing the needs of the 800 million people that are still hungry today. This, however, will require farmers to make a strategic choice between volume and value. When opting for volume, the focus must be on sustainable intensification of farming practices. When opting for value, the focus needs to be on value chain partnerships. As in the other supply chains it is involved in, Amazon is likely going to steer the value chain partnerships and commit to distribution and logistics.

The US G&O market

Let’s take a closer look at the US G&O market as this is the home market for both Amazon and Whole Foods, and, as such, the first agricultural market to likely feel the impact of the deal. Although the market shares of US G&O farmers has declined since 2000 (from 45% to 25%), they still are key in providing food for consumers in Asia and as such necessary to help relieve hunger in the world. The question then arises whether US farmers can maintain this role if more and more affluent (US) consumers demand extensive farming practices. Adoption of productivity-improving digital farming practices and further penetration of robotics in row crop agriculture will increase yields significantly, while efficiency gains in downstream processing (particularly in Asia) will put pressure on demand. As such, we expect that approximately 10 million ha in the US will become available for the ‘extensive farming practices’ demanded by affluent consumers.

All about infrastructure

For agricultural produce that reaches consumers unprocessed, a direct link between farmers and consumers through Amazon’s digital and physical infrastructure might be established. A logistical infrastructure of smart, modular, refrigerated shipping boxes and product imagery software can deliver Amazon’s sought after ‘ultimate consumer experience’ in fresh produce.

The traditional infrastructure for processed foods (traders, food processors, consumer goods companies, foodservice and retailers) is expected to see further fragmentation within supply chains. More demand-driven governance of these supply chains (likely also steered by Amazon) needs farmers to be more pro-active in meeting consumer demands while at the same time the farmers need to protect their position in these dedicated supply chains.

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