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Like many others I awoke this a.m. to the news announcement that Amazon was purchasing Whole Foods Market for an eye-popping $13.7 billion. That’s a huge premium over its public valuation of around $10 billion when the market closed yesterday. The acquisition and price premium begs the question of just what Jeff Bezos is angling at.
Sure, it’s clear that the company is looking to bolster its approach in the grocery business but that still doesn’t make any sense. Safeway offers more than twice the distribution capacity and had a lower market capitalization. This isn’t just about acquiring its way into the grocery category. And Whole Foods business model isn’t really all that attractive. Its operating margins are about five percent which to any tech company computes to losing money. The grocery category margin is generally lousy as a rule. You take out preservatives and factor in the Whole Foods ambiance, it gets worse.
There are likely a dozen ways to rationalize this purchase and Amazon no doubt has its reasons. But the question has to be asked. Does this send the signal that Amazon and its management are starting to plateau? Are we looking at “peak Amazon”?
The idea feels right. Most tech colossi follow a predictable trajectory.
1. Revolutionize the world as we know it.
2. Break heretofore business, revenue and growth ceilings everyone thought permanent and intractable.
3. Look for other means of growth, often outside the company’s core competency.
4. Settle into middle age and manage, looking to hold onto the marketshare it’s taken over the years with modest adjustments to product and service lines.
5. Look out over the complex array of businesses growth it has spawned or bought and wonder how it manages to hold it all together
As Clayton Christensen noted in The Innovator’s Dilemma percentage growth targets become more problematic after companies get to a certain size. More simply put, if you’re looking to grow 20 percent per year that’s a lot easier at $50 million in revenue than when you’re at $5 billion in revenue. At $50 million you need another $10 million to hit target. At $5 billion you need another billion. Success sort of becomes self-correcting and market size starts to constrain your core opportunity.
Think I’m wrong? Just ask Jeff Immelt who stepped down as CEO of General Electric due to a persistently stagnant stock price. At a certain point companies just get so big that the only thing left to do is see if you can dominate other categories the same way the company did its original market. Sometimes it pays off and sometimes it doesn’t. Less important are the micro-level examples and more important are the historical examples. IBM, Xerox, Microsoft and Apple all followed this same trajectory.
Apple is a particularly relevant, cautionary tale. Two to three years ago, Apple could do no wrong. Critics were seen as the lunatic fringe. It was on its way to becoming “the first trillion dollar valuation ever.” I use quotes because that’s a consistent refrain in business circles and conforms to the trajectory outlined above. What’s interesting is that’s a headline recently tagged to Amazon. Now it’s supposedly a three-way race. Will it be Google? Will it be Apple? Will it be Amazon?
These are not the important questions though they do make for interesting business theater. The more important question is when was the last time Apple did anything worthy of its name? Apple Watch? No. Apple Music? Sure, it’s generating a ton of revenue but let’s be clear, this was an iteration of iTunes and not the same as Spotify or Pandora. It just this week announced it’s releasing analytics tools for podcasts. These are not the actions and pronouncements of a disruptive company. Heaven help Tim Cook if the iPhone 8 doesn’t somehow magically give you a foot massage while at the same time auto refuting your nemeses on Facebook. No, Apple is clearly stalled in R&D and has lost sight of the market letting Amazon run past Siri with Alexa only to follow up with a cumbersome retort à la HomePod. And that’s how it happens. One day the company is rocketing into the heavens with no end in sight and the next it’s tweaking its operations to squeeze out more revenue and capacity. Apple, the company that created modern mobility announces HomePod – a curious looking high end alternative to the Alexa. HomePod really was that moment in Seinfeld where George came up with the jerkstore line and scheduled a meeting just so he could drop it only to watch it fall flat. Take that!
It’s important to understand, Tim Cook is a genius. He’s just not the sort of genius most became accustomed to with Steve Jobs. Cook is an operations genius and has kept Apple growing by scaling sales and distribution globally. But we’ve only got one globe and in this day and age that can run dry really quickly, sort of like oil.
At a certain point, you’re pumping in more water than oil coming out. When that happens across the world that’s peak oil. So, the question has to be asked of Amazon and this most recent move, does this action signal a company that’s starting to pump more into the ground than it’s getting out? That’s when it becomes peak Amazon.
James Lanyon is the VP of Strategy and Innovation at T3.