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Supply Chain Squeeze

Amazon has been opening up distribution centers and physical retail stores for a few years now, demonstrating that even the king of e-commerce realizes a strong brick-and-mortar presence will be necessary for future success. But when Amazon acquired upscale natural foods seller Whole Foods Markets, the e-commerce company firmly established a brick-and-mortar "foundation". Enhanced access to high income customers, establishing a grocery channel distribution outlet for its tech products, and enhancing its natural/organic products mix were three additional reasons that Amazon wanted to buy the company that brought natural products to the mainstream.

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Prices have fallen at Whole Foods, but not as much as they need to if the brand is to reverse its slow, downward spiral; and certainly Amazon's expertise in the area of distribution will further provide the combined entity economies of scale and scope. Prices will surely fall as a result, and volume of product sold at retail will rise. But the other side of the equation involves the upstream memebers of the supply chain, and if one thing is certain, natural and organic ingredient suppliers as well as branded products manufacturers have been enjoying large profit margins for decades. Perhaps Amazon will help bring this era of high supply chain costs and even higher consumer price points to a merciful conclusion, not only for Whole Foods shoppers but also for the entire natural products industry. How can this happen?

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Channel captainship. The same leadership that has helped Wal-Mart and other huge retailers "encourage" suppliers to keep prices low, will also work for Amazon. Suppliers that want to maintain a healthy long-term relationship with Whole Foods will likely increase their volumes substantially over time but will lose some in the area of profit margin. This must happen if the retailer is to be able to offer lower prices. Luckily, natural and organic products companies enjoy higher than average profit margins throughout supply chain (although increased competition has reduced this advantage) and therefore have more room to absorb the profit margin thinning that will be caused by Amazon's stong-arm tactics. And as I said, they will likely make up for the lower margins with higher volumes.

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There is evidence this is moderate form of supply chain "bullying" is already happening with brand partners now having to pay much more than in the past for premium shelf space as well as new pressure Whole Foods has placed on its brand partners to offer more in-store discounts and other sale spromotions in the name of lower consumer price points. It's only a matter of time before Whole Foods begins to ask for lower prices from suppliers overall. Just like Wal-Mart, Kroger, and all of the channel captains do.


Discussion: Can you think of captains in other channels besides natural products (Whole Foods Markets), grocery (Kroger), and general merchendise (Wal-mart)? Why are most channel captains retailers?