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Amazon recently announced its full year earnings. According to multiple press releases on the topic, Amazon experienced a decline of 3% for all its physical stores. However, when several accounting adjustments were made to the numbers, Whole Foods experienced an annual growth rate of 6%. Most retail analysts were unimpressed with Amazon’s numbers, especially Whole Foods growth rate. Although 6% growth is actually quite good, retail analysts were expecting a much bigger number.

Like clockwork, whenever Amazon announces its earnings, I am contacted by analysts, readers of my articles on Forbes and the general public seeking my opinion on Amazon’s results. I’ve become accustomed to the line of questions and I’m more than happy to answer any question I’m asked. However, I’ve  begun to notice something different in regards to the type of questions I’m being asked. Instead of analysts speaking positively about the future of Whole Foods, analysts are asking me one question more than any other: Do you still believe Amazon should have acquired Whole Foods?

Why am I asked questions about Whole Foods? Because in 2013, I wrote a research paper where I applied game theory portrayed in the Russell Crowe film, A Beautiful Mind, to the grocery industry. Amazon was one of several companies I analyzed. In the paper, I recommended that Amazon should acquire Whole Foods, making me one of the first people to see the value of Whole Foods to Amazon.

I posted the research paper on LinkedIn in May 2016, more than one year prior to Amazon announcing it was acquiring Whole Foods. The research paper proved popular with members of LinkedIn and the press even though the paper is almost 100 pages in length. Nearly every leading newspaper globally has referenced the research paper in articles written about Amazon’s grocery ambitions.

No Online Retailer Will Dominate The Grocery Industry

In 2013, Amazon was slowly but surely growing. The company was entering new categories and although the company wasn’t profitable, it was clear that Amazon was on its way to being a force in retail. However, Amazon had a minimal presence in groceries, something I identified as a weakness. Analysts, academics and reporters who have read my research paper and who are familiar with Amazon’s strategy in 2012/2013 usually ask me two questions:

  1. Why did I believe at the time that Amazon should be in the grocery business?
  2. Why did I believe at the time that Amazon should acquire Whole Foods?

I believed in 2013 and I believe today that Amazon should be in the grocery business because consumers make more purchases of groceries than anything else. The grocery market is $800 billion and the food industry generates $1.5 trillion in sales. Food and groceries are strategic to Amazon simply because of their market size. Data, an ability to introduce private label products and increasing Amazon’s brand awareness are additional reasons for Amazon to have a presence in groceries.

I was so convinced that Amazon should have an increased presence in groceries that I evaluated the possibility of Amazon building its own stores. I even went through the process of designing the type of store Amazon should build. I named the concept the Multi-Format Store and the design is explained in the research paper I wrote.

After reviewing Amazon’s strategy for groceries, I identified several reasons why Amazon should acquire a grocery retailer:

  • Jeff Bezos hired a team of executives from a company called Webvan to create a grocery service for Amazon that eventually became AmazonFresh. Webvan is considered one of the biggest failures of the era.
  • Based on my research, I don’t believe Webvan would have succeeded under any circumstances. Creating a company similar to Webvan at Amazon didn’t make sense to me.
  • The grocery business requires extensive knowledge about many topics. Amazon lacked experience in groceries. However, by making an acquisition of a leading grocery retailer, Amazon could gain the expertise required to succeed in groceries.
  • I evaluated Amazon making an acquisition of the leading online retailer at the time, Peapod, instead of Amazon retaining AmazonFresh. (Peapod has the misfortune of being owned by Ahold-Delhaize. Peapod would be a much bigger and better company if it was owned by PepsiCo, QVC, Google, Costco, Uber or several other companies. Peapod would also be successful operating as a stand-alone company. I am on the record as stating Ahold-Delhaize should divest Peapod as I believe there is a better digital, online grocery and retail strategy that Ahold-Delhaize should pursue.)
Webvan wanted to make online grocery ordering and delivery more popular than shopping in stores. It... [+] didn't happen. CNET named Webvan one of the largest flops in history. Photo Credit: Bloomberg News

The most important reason I identified as to why Amazon should acquire a physical grocery retailer is because 65% of consumers prefer to shop for groceries in a supermarket. Of all the groceries sold in 2018, only around 3% were purchased online. According to a recent report by CommonSense Robotics, online grocery sales have the potential to increase between 10% to 20% of the market by 2023. However, many grocery analysts believe online sales of groceries may only remain in the single digits over the next ten years or more. Physical grocery stores matter. A lot.

Buying groceries in a supermarket is much more popular than buying groceries online because of a behavior I witnessed globally in grocery stores. I coined the term “Inspect &  Select” to describe the behavior. Customers want to Inspect certain items before they Select an item for purchase. Meat, milk, eggs, dairy, baked goods, fresh fruits and fresh vegetables are very personal to consumers and they’re the items customers inspect the most. Don’t believe me? The next time you’re in a supermarket, watch the number of customers that inspect the items I listed before placing an item into a cart.

Consumers do not trust others to Inspect and Select the items I listed. The majority of grocery items ordered online consists primarily of Center Store items: packaged food, general merchandise, beverages, paper towels, beauty, and home care, for example.

Because consumers prefer to shop for groceries in stores, I came to the conclusion that no online retailer (even Amazon) will dominate the grocery industry. Stores are a must-have to become a major player in groceries.

Why Whole Foods?

If Amazon chose not to build its own stores, in order for Amazon to be successful in groceries the company had to acquire a non-union grocery retailer with an impeccable reputation for selling high-quality fruits and vegetables, meat and other fresh food items. Sound familiar? Companies that are non-union prefer to avoid buying companies that are union. Just a fact. However, a union company may make an acquisition of non-union company even though the workers at the non-union company may choose to vote for union representation.

In addition, since Amazon had never acquired a grocery retailer, I determined that it would be in the best interest of Amazon to consider two options: acquire a regional grocery retailer operating in just a few states, or acquire a small to medium-sized retailer with stores located nationwide and with plans to continue expanding nationally.

After reviewing all available grocery retailers, I identified two that would best meet the needs of Amazon:

  • Best Regional Grocery Retailer: H-E-B. The company operates 340 stores in Texas and 55 in Mexico. (If I had to name the best grocery retailer in the U.S., I would choose H-E-B.)
  • Best Medium-Sized Nationwide Retailer: Whole Foods. At the time I selected Whole Foods, the company operated 362 stores. The company was small enough that Amazon could easily scale the business.

I chose Whole Foods over H-E-B not because Whole Foods is a better retailer (it isn’t). I chose Whole Foods because Amazon serves customers in every state in the U.S. Although theoretically possible for Amazon to acquire H-E-B and scale the company, it would be much more difficult to do so than acquiring Whole Foods, which already had a presence nationwide. I also chose Whole Foods because it had a well-earned reputation for being a leader in fresh food.

H-E-B is a Texas-based grocery retailer founded in 1905 by Florence Butt. In 1919, Howard Edward... [+] Butt, the youngest son of Florence, took over the store. H-E-B is consistently ranked as one of the leading retailers in the U.S. Photo Credit:

The combination of Amazon’s prowess in online retail and Whole Foods reputation as a leading grocery retailer convinced me that if Amazon acquired Whole Foods, the company would be able to create an ecosystem consisting of online grocery ordering and delivery and stores located nationwide. I outlined my views on the topic in this article on the day Amazon announced it was acquiring Whole Foods. (The acquisition of Whole Foods occurred a few months after I had left the company to start a consulting practice and I was not involved in the acquisition.)

On a side note, Kroger CEO Rodney McMullen was recently quoted as saying Kroger acquired the retailer Harris Teeter in 2013 as a “preemptive shot against Amazon.” In 2013, Harris Teeter had 212 stores located primarily in states located in the Southeast. Harris Teeter is highly respected. At the same time I was completing my analysis to identify a grocery retailer for Amazon to acquire, Kroger was evaluating the same retailers as me.

My research indicated that Kroger should have acquired Whole Foods over Harris Teeter as doing so would have significantly reduced Amazon’s ability to become a threat to Kroger. Had Kroger acquired Whole Foods, Amazon would have been left with few options in terms of acquiring a non-union grocery retailer with stores located nationwide. If Amazon eventually becomes the dominant player in groceries, the fact Kroger chose Harris Teeter over Whole Foods will become a business case study for the ages.

Amazon’s Bridge Too Far

Even with the acquisition of Whole Foods, is it possible that Amazon could fail to achieve the lofty goals so many analysts believe Amazon can achieve in groceries? Yes, it is absolutely possible that Whole Foods will become Amazon’s bridge too far.

My primary concern is that even though Amazon owns Whole Foods, cofounder and CEO of Whole Foods, John Mackey still runs the company. Mackey is a very experienced executive and a very kind and caring person. Mackey is also someone I refer to as a “true believer.” No matter what, Whole Foods must remain focused on organics and the only path to success is through conscious capitalism. If the intent of Amazon when it acquired Whole Foods was to maintain the status quo, they’re doing a pretty good job. The changes made thus far at Whole Foods are best described as non-invasive.

The biggest change made by Amazon was to direct Whole Foods to end its relationships with local suppliers that couldn’t meet customer demand across all stores. Granted, Whole Foods customers enjoyed finding unique products in the stores that couldn’t be found at other grocery retailers. However, in order for Amazon to scale Whole Foods and reduce costs, Amazon had to standardize the assortment of products and eliminate the extreme amount of product variance across Whole Foods stores.

Instead of ordering small quantities of products from many small suppliers, Whole Foods now orders and receives the majority of its assortment from large suppliers that can provide enough inventory for every Whole Food store. Ordering larger quantities of products allows Whole Foods to receive a larger discount on price. It also eliminated many specialty items that had been provided by small suppliers.

John Mackey, CEO of Whole Foods. Photo Credit: Bloomberg Finance LP

Amazon only acquires companies and enters categories it can scale, Amazon cannot maintain the status quo at Whole Foods. Mackey grew Whole Foods as large as he could prior to being acquired by Amazon. Today, Whole Foods has a market share of only about 2%. For a frame of reference, Walmart has a 17.3% share of the grocery market and Kroger has a 9% share. Whole Foods has to grow. In order to grow, however, Whole Foods will have to change, a lot. And this is where it gets tricky.

The one thing that differentiates Whole Foods from other grocery retailers is that Whole Foods bans selling foods that contains artificial preservatives, colors, flavors, sweeteners, and hydrogenated fats. In the mood for Cheetos and Coca-Cola? Don’t go to Whole Foods. Why? Because John Mackey doesn’t want such products in the stores. Here’s the problem: Kroger, Walmart, Albertsons and Ahold-Delhaize don’t have such a rule. This means their stores sell a lot of products that can’t be found at Whole Foods. Their stores also have something else: more customers than Whole Foods. Why? Because most consumers aren’t true believers like John Mackey.

To grow, Whole Foods can certainly build more stores, something I cover in this article. However, more stores aren’t enough. To take market share, Whole Foods will have to end its ban on the foods customers want the most: name-brand CPG products from PepsiCo, Coca-Cola, P&G and other large CPG companies. Whole Foods will have to adjust its pricing to ensure the prices in its stores are attractive to customers. And Whole Foods will also have to do something else: replace John Mackey.

I believe that Amazon must identify an Amazon executive to replace Mackey no later than the end of 2019. Competitors of Whole Foods are accelerating capital investments and making changes to better compete with Amazon and Whole Foods. Companies outside of the grocery industry like Google, Facebook, Uber and Microsoft have identified the strategic value of groceries and food. Just as Amazon shocked the grocery industry by acquiring Whole Foods, any of the companies I listed could easily do the same. For example:

  • Microsoft can expand LinkedIn to become an e-commerce platform
  • Facebook can acquire eBay or another platform and integrate the platform to turn Facebook into an integrated e-commerce and social media platform
  • Google can acquire eBay, QVC, Shopify, Instacart, Costco or Target to become a retailer instead of losing money trying to enable retail; integrating QVC and YouTube offers incredible possibilities for a highly immersive retail experience
  • Uber is a dark horse that could emerge as a leader in groceries
  • Target and Kroger can merge
  • Aldi will operate 2,500 stores by 2023, and is a growing threat
  • Lidl may decide to make a big move by acquiring Sprouts Farmers Market or Family Dollar

The potential strategic moves that can be made in grocery retailing are nearly endless. Whole Foods doesn’t have years to change even though Amazon prefers to plan a category strategy over a period of ten years. Whole Foods can’t watch from the sidelines as billions of dollars are invested by its biggest competitors. Walmart and Kroger realize that under no circumstances can they lose the grocery war to Amazon. This means that Amazon may have no choice but to accelerate its investment in groceries.

I’m convinced that once Mackey is replaced, Amazon is going to blitzkrieg the grocery industry and take steps to better position Whole Foods and delight more customers. This will be accomplished by introducing name-brand snack foods and other products currently not sold in Whole Foods to attract more customers. I spoke with several grocery executives and each stated that Whole Foods is more than capable of creating an experience that combines organics with name-brand CPG products. Each executive also stated they believe as I do that Amazon has to make the change in assortment.

In addition, Amazon will either invest in opening more Whole Foods stores or Amazon will make an acquisition of another retailer. I remain convinced that Amazon should do one of the following:

  • Acquire Costco
  • Acquire Boxed (Boxed should be acquired regardless if other acquisitions are made)
  • Acquire Target
  • Acquire Menards

What Amazon can’t do is maintain the status quo. Amazon’s future in groceries will depend on Amazon becoming much more aggressive in its expansion of Whole Foods, and especially in its willingness to make significant changes to the product assortment at Whole Foods to attract more customers. Amazon can’t scale a grocery chain that only a small number of customers want to shop at. Instead, Amazon has to find a way to attract new customers to Whole Foods. Amazon cannot maintain a 2% market share in groceries.

As harsh as it may sound, within the next 12 to 24 months, Whole Foods will exist in name only. This is why I recommended to Amazon to eventually change the name of Whole Foods to Amazon Prime Grocery, Prime Groceries by Amazon or Amazon Fresh. I won’t be surprised if Amazon does eventually rebrand Whole Foods. It’s hard to reimagine the grocery experience if everyone wants to hold onto the past.

As for John Mackey, I believe he has a good chance of being elected to office if he chooses to run. If former Starbucks CEO and founder Howard Schultz runs for president in 2020, Mackey would make an interesting choice for VP. However, Mackey can also easily run for a Senate seat or even governor of Texas. Mackey is a true believer. When he leaves Whole Foods, he will have to find another cause.

Do I still believe Amazon made a wise decision in acquiring Whole Foods? Yes.