Whole Food for Thought

An important point that didn’t make it into my opinion article arguing that the FTC should unwind Amazon’s acquisition of Whole Foods is this: Most people don’t buy groceries online today, but eventually they will.

That’s why I wrote that Amazon’s website, along with its voice search service, Alexa, constitute an essential marketing platform, required for future survival in grocery retail. Whole Foods now has a huge advantage over all other grocery retailers in attracting the coming wave of online grocery shoppers, because most people already use Amazon as their default search engine for finding goods to buy online. When these people start embracing online grocery shopping, they’ll log into Amazon to find a way to do that. And all they will find is Whole Foods. Even giant Walmart is unlikely to solve this problem, because its own website attracts far fewer online shoppers.

The central role of online product search to the future of the grocery market explains why Walmart responded to the Whole Foods deal by partnering with Google to offer Walmart items on Google’s Alexa competitor — Google Assistant. Google isn’t dominant in product search, or in voice search, so while that partnership may help Walmart, it won’t eliminate Amazon’s promotional advantage.

If the FTC were to unwind this deal, Amazon could still get into groceries, but only as a search platform, allowing grocery retailers to offer delivery services through Amazon, much as Amazon already opens its fulfillment centers to third party sellers. That would give existing retailers a more equal shot at search visibility on Amazon’s website. If the FTC won’t unwind the deal, it should at least order Amazon to give all grocers visibility, by including their offerings on its website, alongside those of Whole Foods.

True, the Whole Foods deal should lead to more competition in grocery retail for the time being. In order for Amazon to leverage its product search dominance to win market share, it must charge prices low enough to avoid encouraging consumers to give up using Amazon as their search default. That explains why Amazon cut Whole Foods prices immediately after the acquisition. As long as those prices stay low, consumers will stick with Amazon, and as online ordering takes off, Whole Foods will expand its share of grocery retail.

That in itself is a problem, and enough for the FTC to intervene, because it means that Whole Foods will win not by charging better prices or offering a better product, but because it can match the prices and product quality offered by others, and then tip the scale in its favor through its dominance of online product search. Competition realizes its potential only when firms win by charging lower prices or offering products of better quality.

Consumers will end up choosing Whole Foods not because it is better, but because it’s not worse, with visibility on consumers’ favorite product search platform becoming the deciding factor in the decision which grocer to use. The FTC won another case in the 1980s on precisely this ground, arguing that the maker of the ReaLemon brand of lemon juice used its promotional advantage to win market share while charging competitive prices.

A second consequence is that if Whole Foods manages to run the competition into the ground, then it will be able to raise prices eventually. Entering the grocery retail market, even an online market, is expensive, requiring a huge distribution network connecting, among other things, large numbers of suppliers of perishables to the grocer. If Walmart and other grocery retailers disappear, their distribution systems will disappear with them. And any competitor wishing to enter the market in response to eventual price hikes by Whole Foods will have to rebuild distribution from scratch.

Of course, Amazon might fail to capitalize on its advantage. Brand loyalty, or the promotional advantage bricks-and-mortar retailers have in promoting their own online delivery services to consumers shopping in their stores, might cause consumers to gravitate to the retailers they use today when they start shopping more online.

But the promotional advantage created by access to online product search platforms is real, and is likely to play a role in all consumer product markets in the future, if it does not already. The EU was concerned about precisely that when it fined Google $13.7 billion in June for privileging its own product search engine over others in its search results. Until government starts to treat product search as an essential facility or a public utility, an essential playing field that must be level if competition is to take place on the characteristics we care about, like price and quality, this problem will persist.