With Whole Foods Deal, Amazon’s Empire Grows (Episode 28)

It’s also going to begin to blur the lines between online and offline retail. What we’re seeing is the beginning of Amazon taking its monopoly power online and then beginning to extend that into the physical world of retail. That has huge implications for all of us, for the economy as a whole, for innovation, competition, for consumers, for workers. Those are the deeper issues. It’s easy, I think, to look at Whole Foods and say, “Well, they’re a relatively minor player in the grocery industry.” As you noted, they’re a sort of niche player for a set of sort of affluent, mostly urban customers. That’s true, but they’re a foothold into one of the most pivotal, important sectors of the consumer goods industry, which is, of course, food.

The question now is are we going to begin to see that in the grocery sector, which, it’s a sector with very thin margins. How is that going to affect competing retailers who don’t have the luxury, particularly independent stores, of losing money for years on end in order to stay in the market? Also, how is it going to affect suppliers, farmers and others? The way that Amazon ultimately finances that below-cost selling is partly, as I mentioned, through the willingness of its investors, the willingness of Wall Street not to require profits, but also by squeezing fees and margin from suppliers.

The food sector is one of the few bright spots in the economy. In fact, the Federal Reserve just came out with this book a few weeks ago where they talk about how in both urban and rural areas the growth of local and regional food systems, food manufacturing at a smaller regional scale, retail systems and so on, that has been a real driver for some goodness in local economies, some new growth and economic vitality in places that were missing it. Amazon could really change that. It could come in and put pressure in a way that pushes down returns to those producers, to their workers. We’ve seen this in the book industry. The average author income is down about 30%, and many people in that industry say that’s because of Amazon flexing its muscle and demanding bigger discounts. Are we now going to see that same thing in the food sector?

As you noted, a lot of grocery stores are unionized, and workers earn a family-supporting wage with benefits in those jobs. Amazon has a very different labor model. It has a kind of 19th Century labor model that pays very low wages, uses a lot of temps and increasingly automates jobs. When we think about what this means for us on the income side of the ledger in terms of our ability to get decent work to have thriving local economies, there’s a lot of reason to be concerned.

One of those pieces is the online platform. I mentioned that most online shopping now starts on Amazon’s platform rather than going through a search engine, so, effectively, they’re precluding competition right out of the gate, they’ve figured out how to do that. For anybody else, any other retailer or manufacturer that wants to sell online, increasingly what that means is that they have to become a third-party seller on Amazon’s platform because if they’re just doing it through their own website there’s less and less traffic, there’s less and less ways that anyone can even discover them because people are starting right on Amazon.

Then the other two big pieces of Amazon’s infrastructure, one is the Cloud, they control over a third of the world’s Cloud computing capacity, everyone from Netflix to the CIA uses Amazon. Then the last piece that they’re building out quite rapidly right now, in which the acquisition of Whole Foods is really helping them do, is shipping and package delivery. Amazon is now freighting goods from China across the ocean. They’ve got cargo planes that they’ve leased. They’ve got a big network of delivery points and warehouses. They’ve got their own trucks that they’ve leased. They’re doing their own deliveries in a growing number of cities. Their idea is not only deliver their own packages, but to, basically, begin to displace UPS, the postal service, and become the package delivery service, again, that anybody who wants to have a package arrive on your doorstep is going to have to use.

The importance of this, it’s just so critical, because what it means is that Amazon, in effect, has set up a system where it owns the rails, and therefore it can privilege its own goods and products on those rails. If it wants to knock other sellers off and take the buy box for itself on its platform it can and does that all the time. It decides, “We want to be a big player in apparel, everybody else we’re going to shove to the side.” It’s able to privilege its own goods. Then for the parts of the market that it doesn’t really want to deal with for one way or another, it just levies, effectively, a tax on all those other companies that are selling goods that it doesn’t really want to deal in, it gets a cut of that.

It’s incredibly powerful and, basically, Amazon can toggle back and forth between those two sides of its business in ways that amplify its market power in the other. The best analogy in history, as I said, is the railroads, but in a way this is a novel kind of setup that we’ve never seen before. What is happening is that we are moving from an open market that’s governed by democratic rules to a market that is, effectively, privatized, that is an arena run by Amazon as opposed to run by a set of rules designed to encourage competition.

We have to remember that we can have the evolution in technology. We can have the benefits that Amazon has brought, and Amazon can continue to be a competitor, while also taking steps to ensure that competition is open and the next company that’s going to come along and invent a really incredible great thing has a chance to get started, because that’s the problem right now. The next company that might have a great idea, there’s no oxygen left. They’re going to be strangled in their infancy by Amazon before they even get started.

We used to, in the middle of the 20th Century and early part of the 20th Century, we used to take a much more aggressive stance with regard to proactively promoting competition. In the 1940s we went after AT&T, and the federal government said, “You’re sitting on all these patents for these great technologies. You have to actually license those patents.” The federal government did this with a number of other companies.

The result was that AT&T continued to be there and continued to innovate. These patents were, then, available to all these other companies and, overall, the economy, society, consumers benefited. We got this best-of-both-worlds, and I think that’s now how we really have to begin to approach Amazon. Incidentally, one of those patented technologies that was required to be unlocked from the AT&T vault was for the transistor, which, of course, led to the whole computer revolution. I think that’s the kind of mindset that we need to take and framework we need to take when we look at Amazon.

We have less liberty to go out there and ply our trade and operate in an open marketplace if that marketplace really isn’t open but is, in fact, controlled by this one entity. That’s a political issue as much as it is an economic one. We understood that for most of our history. From the Boston Tea Party, really, up until the 1970s, 1980s there was this sense that the purpose of breaking up these concentrations of power, keeping corporations in check, dispersing economic power, the reason for that was as much political as it was economic.  

Essentially, we’re facing this potential future where it’s Amazon and Walmart, these two behemoths that will interconnected into our homes through the web, through voice-controlled speakers. We’ll have this integrated digital experience where we’ll ask our Echo or we’ll ask our Google Home to send us whatever the things we want. They will choose the product for us, and we’ll have a closed marketplace where other companies can’t break into that fortress.

I continue to be incredibly concerned about Walmart’s market power. They’re a quarter of the entire grocery industry in this country and a huge percentage of everything else. There is a distinction, the one that we talked about, which is that Walmart doesn’t control this infrastructure as we talked about with Amazon. Amazon is this different beast, but it’s an illustration of how monopoly and concentration tends to beget concentration on its own. This is not a transition, but, really, a further consolidation of the market. Can another company come along and unseat them?

I think it’s pretty remarkable that it’s now been quite a few years since we’ve seen an internet company come along and change things. Facebook, Google, Apple, Amazon, those guys are getting pretty old at this point, and there is no new entity that has come along, in part, because if one gets to be too successful, one of those big companies either pushes it out of the market in a predatory way, or they buy it up. How is it that we’re going to see a new competitor come along and challenge Amazon?

When that whole thing collapses and we just have a couple of dominate channels, if you’re a small company or a new company how are you going to get your product featured? You may be able to get it onto Amazon’s platform, but no one’s going to see it if it doesn’t show up in the search results in the first couple of pages or if it’s not otherwise featured or promoted. The same thing is true with shelf space at Walmart, so we basically cut off all of this diversity. That new business formation, that’s where we get a lot of our innovation over time. The best new ideas come from those new businesses. It’s also the source of most of the net job growth. It’s the vitality of our communities, all of those small and mid-sized businesses that make the places we live healthy, that give us a measure of control over our future at the local level because they’re owned locally, that matters.

One of the arguments that we’ve been making at the Institute for Local Self-Reliance is that it’s not just a matter of taking markets that have one or two big players and making them markets with four or five big players. We need to think about market structure, that is, that having markets that have a mix of different size businesses that include lots of small and mid-size businesses as well as a few large businesses, that those industries are actually healthier, and we know this from a lot of economic research. That kind of mix also produces the healthiest communities and the healthiest democracy. The idea that we’re going to have Walmart and Amazon duking it out, and then maybe some other company, theoretically, might come along and knock Walmart out or knock Amazon out, that, really, does not present the kind of diverse economy that’s going to yield all the kinds of benefits that we know we get when we have a truly diverse mix of businesses in an industry.

As we turn off this episode, please go and rate our show where ever you found it, on the Apple Podcast, on Stitcher, any other place you can find us, please give us a good rating. Tweet about it, tell your friends about these interviews. This show is edited by Lisa Gonzalez. It’s produced by Nick Stumo-Langer and Lisa. The music is by Disfunction Al. It’s a song called Funk Interlude. Thank you everyone, and thank you Stacy.