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

Date: 7 Sep 2017 | posted in: Building Local Power, Podcast, Retail | 0 Facebooktwitterredditmail
The latest Building Local Power podcast episode features a discussion between ILSR initiative director Christopher Mitchell and co-director Stacy Mitchell on the Amazon-Whole Foods deal. The conversation features a number of issues, including why Amazon’s growth isn’t that innovative after all due to their market power as a crushing force for consolidation. Much of the conversation is an extension of our Amazon’s Stranglehold report, co-authored by Stacy and ILSR researcher Olivia LaVecchia.

Amazon’s role as a marketplace, a distributor, and as a producer of items paired with their ability to sell below cost marks it as a formidable force of consolidation in the American economy. As Stacy says, “concentration begets concentration.”

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?

Christopher Mitchell: Hey, Stacy.
Stacy Mitchell: Hey, Chris, how are you?
Christopher Mitchell: Hey, I’m doing pretty good. I’m curious if you have a number for us for this week.
Stacy Mitchell: It’s 465.
Christopher Mitchell: 465, what is that?
Stacy Mitchell: That’s the number of Whole Foods stores that are now owned by Amazon.
Christopher Mitchell: Yes, and we can say “now owned” because we waited a little bit to get a sense of what was happening before doing the show rather than just rushing in like other people. This week we’re going to be talking about Amazon’s acquisition of Whole Foods and some more monopoly power type stuff. Stacey is the famous Stacey Mitchell of the Institute for Local Self-Reliance out in Portland, Maine. I am Chris, the less-famous Mitchell of the Minnesota office. I work on broadband issues. Stacey works on independent businesses, and we’re a part of the team here at the Institute for Local Self-Reliance that’s fighting to build local power to make sure that communities are strong, and that we’re all happy to wake up tomorrow morning. I think that’s kind of a good summary.
Stacy Mitchell: That’s right.
Christopher Mitchell: Let’s talk about Amazon, let’s just maybe some basic facts to refresh people’s memories and maybe people just heard about it without really getting into it. What exactly happened? To be clear, this is Amazon. It’s not Jeff Bezos personally, as in the acquisition of Washington Post. I think those are important distinction.
Stacy Mitchell: That’s right. Back in mid-June Amazon announced its intention to acquire Whole Foods, the chain of natural foods grocery stores. Just about six weeks later it was quietly approved by the Federal Trade Commission, or the FTC. It was approved with lightning speed in what we can only assume was a fairly cursory review of the issues. This is despite the fact that a lot of people, including people in the food industry, folks like us who study concentrated market power, legal scholars, members of Congress, a lot of folks had raised serious concerns about this merger. Yet, it appears that the FTC approved it rather quickly and didn’t take a deep look at what those issues are.
Christopher Mitchell: You say “appears”, this is an interesting point that goes along with the speed, which is that we don’t really know because, what’d they issue, three sentences in terms of their decision?
Stacy Mitchell: Yeah, it’s really remarkable the lack of transparency. Yeah, it was a total of three very basic sentences in their statement that said that this merger had been approved. There’s no further explanation in terms of how they chose to look at this deal, whether there were particular things that they tried to evaluate, what went into their thinking. Again, this despite the fact that there had been enormous amount of public discussion of it, and rather than sort of supporting that kind of active democratic engagement and oversight the FTC is, basically, this opaque black hole. We don’t know what they looked at.
Christopher Mitchell: Why is this something that rises to the level of us talking about it? What’s the big deal? I think a number of people might just think, “Well, Whole Foods is just some place where relatively wealthy, young, often white families go, and who really cares about them anyway?”
Stacy Mitchell: I think the concern for me is that Amazon has monopoly power in online retail. They are capturing almost one out of every two dollars that Americans spend online. They’re also the place where 55% of all online shopping searches start. People are no longer starting at Google or a search engine, they’re starting directly at Amazon. They have this tremendous market power online, and there are various ways in which Amazon is going to use Whole Foods to really augment and solidify its hold over online commerce.

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.

Christopher Mitchell: When I think about Saint Paul, Minnesota where I live, and I very much want to keep living, I think about good jobs and how to make sure that the community has, not just high tech jobs and jobs for people that have college degrees, graduate degrees and what not, but also jobs for people that may only have a high school degree or didn’t finish high school. One of those places is the grocery stores. Because many of them are unionized they have a means of employing people, and those people know that they’ll have a future. They have some job security, they have some decent wages and things like that. I think maybe you could just describe for us what life is like as a grocery store today because this isn’t somewhere where they’re like, “Oh, we’ll just trim down our margin a little bit and we’ll still be okay.” This is sort of an area in which Amazon could make a huge difference because it’s already kind of already on a thin margin, right?
Stacy Mitchell: Yeah. We’ve seen throughout Amazon’s history it has used its ability to lose a lot of money in order to take market share. It did this for many years in books where it would sell books below its own cost. Of course, if you’re a bookseller or a publisher you can’t compete with that because you have nowhere to make that up. Amazon could do that because its investors were willing to allow it to post losses. It sold books at a loss, and then we’ve seen it consistently do this. It will strategically sell below cost in order to push competitors out of the market.

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.

Christopher Mitchell: One of the reactions that I see from people is to say, “Well, I really like Amazon. Amazon’s a brilliant business in terms of how they do business. Maybe this will be terrific because Amazon is going to lower the prices of food and things like that.” Now, just ignoring for a second, obviously, that the cost may go up in the future, I’m curious for people who like Amazon, can you just cite some of the examples? You mentioned the books, but are there other examples in which we have a sense that Amazon will ultimately be abusing its power in order to run others out of business?
Stacy Mitchell: Amazon has done this with upstart rivals in the e-commerce space. One good example is Zappos, the shoe retailer. This was a company that came along selling shoes online, really built a unique and beloved business doing that. Amazon decided one day that they wanted to own that business. They went to Zappos and tried to buy them, and the founders were not interested in selling, and so Amazon responded by beginning to sell shoes at a loss and offering free shipping. Zappos, in order to continue to compete, had to match those, and it just started bleeding money. It was just losing so much money. Finally, the company just couldn’t do that any longer and they gave in, and now Zappos is owned by Amazon. We saw Amazon do this with Diapers.com. They have this pattern of using their muscle to eliminate competitors that come along that might challenge them. That’s bad for consumers. At this point I don’t even know if a business that had a good online retail strategy could even get financing. What bank, what investor would want to fund that given what we know Amazon is going to do?
Christopher Mitchell: I think that’s such a key point, and something that people don’t always appreciate is that this impact in terms of who gets investment to build those next business, it will prevent all kinds of ideas from ever coming out, and we’ll never know that had lost them. One of the things that you focused on in a recent editorial in which it was entitled “Amazon is trying to control the underlying infrastructure of our economy”, and it was in Motherboard a few months ago. I think people think of Amazon as another competitor, but you’re arguing that, basically, Amazon is both the distributor, it’s basically the marketplace, and it’s figuring out how to torpedo those who are using it. It’s almost like a Hollywood monster, frankly.
Stacy Mitchell: Yeah, that’s right, yeah, the many-headed Hydra. Yeah, Amazon, it’s vastly more of a threat to competition. It’s like an order of magnitude more of a threat to competition than, say, Walmart because Amazon isn’t a retailer. It’s easy to think of them as a retailer. They’re the biggest seller of books, toys, electronics, clothing online or off. They’re a huge retailer, and we tend to think of them that way, but that’s not really what they are at their core. What they’re interested in is controlling, as I said in that Op-Ed, the underlying infrastructure of the economy. They want to own the rails, essentially, that all the other businesses that want to sell you stuff have to ride in order to get to you.

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.

Christopher Mitchell: I think that leads to an interesting question, which is that you’ve convinced me, and I hope many other people, that Amazon is, indeed, not winning on a fair, level playing field. They are doing things to manipulate the playing field to benefit themselves over their rivals. I think that is something we should be deeply concerned about. Other people just focus on how Amazon is incredibly innovative, and I think none of us would deny that. They are very good at what they do, even just ignoring all the, perhaps, underhanded things. Just the fact that they innovate. They find ways of driving cost down. They do all kinds of great technical things in an efficient manner. For someone who just looks at that side, let’s just say that Amazon is not doing anything underhanded, but just is such a great competitor that they’re going to run everyone else out of business because they’re so good at running their businesses. Is that something we should worry about?
Stacy Mitchell: Amazon is incredibly innovative. It’s important when we think about this not to conflate the technological innovations that Amazon has brought with the implications of its market power. If you look at how Jeff Bezos’ response to questions about this, he’s got a very clever way of essentially saying, “All these other industries are being hurt, not because we’re incredibly dominate, but because of this evolution in technology.”

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.

Christopher Mitchell: In the Op-Ed that you wrote on Motherboard you quoted John Sherman, Senator and co-author of the Sherman Antitrust Act. He said, “If we will not endure a king as a political power, we should not endure a king over the production, transportation and sale of any of the necessities of life.” I think it’s a remarkable thing is to say in some ways it kind of plays into this idea that even if there’s an entity that’s really, really good at something, we still have to limit their power because we’re the kind of country that was built on the idea of decentralizing power and not letting anyone, even if they’re benevolent, be a king over us.
Stacy Mitchell: That’s absolutely right, and it’s a quote that really speaks to the political nature of concentrated power, that this isn’t just about economics and markets. It’s also that when you concentrate that kind of power economically you, invariably, have political power, not only over government, the ability to persuade, lobby, donate cash, otherwise affect what government does, but, in effect, you control people’s livelihoods. There’s this sort of centralization of power that means we as individuals are less free.

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.  

Christopher Mitchell: One of the question that I really wanted to hit you with, and I think this is one of the harder ones, a little bit, is something I’ve heard. I heard a reporter framing it in this way saying that when this reporter had started off they were writing about Microsoft, and how people were worried that Microsoft would use its power over the operating system in the 90s to dominate the whole future of computing, and how that person does not own a single Microsoft product today. Oddly enough this person, basically, said, “So we never had to worry about Microsoft,” which I think is a totally false reading of history. Nonetheless, I think people would look at you, Stacey, and say, “Look, you said Walmart was going to kill everything and harm us, and now you’re talking about how Amazon is going to kill even Walmart. So, why should we worry about this when, maybe, the Amazon killer is right around the corner and this is the way things work?”
Stacy Mitchell: Amazon has not killed Walmart, and I think it’s a good point as all eyes are on Amazon we should also take one back and look at Walmart. How Walmart has responded to Amazon’s power is that they’ve gone out and bought up a number of internet startups like ModCloth, Bonobos, eliminated these rival companies that may have come along and given us a more diverse marketplace. Then they’ve also entered into this partnership with Google where they’re going to be using Google Home as a way to do voice-controlled shopping.

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?

Christopher Mitchell: There’s something that I’m curious how you’d react to, which is one of the ways that I react to and say, “Look, let’s just assume that in eight to 10 years another company is going to come along and defeat Amazon, and it’ll be a new one.” In some ways I feel like we’re a bunch of cute beagle puppies that are locked in a ring with two warring elephants. They’re stomping around and sometimes falling over, and sometimes a new elephant comes in. It kind of sucks to be the cute little puppies in that situation. Even if the elephants change identities and things like that, it’s not good for our communities.
Stacy Mitchell: That’s exactly right. We published this report last November called “Amazon stranglehold”. One of the parts of the report that I think is so useful is that we spent some time talking about the importance of a diverse marketplace, and this is especially true in the retail sector. The more outlets that there are, the more different retailers that there are, the more chances that a company that comes along and produces a new product, the more opportunities they are going to have to be able to bring that product to market, to find one or two or three or a number of retailers that are willing to carry that and promote it to their customers.

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.

Christopher Mitchell: I would reference the interview you did two weeks ago with Gina Shaffer and talking about how when she built that hardware store in an area and how thrilled people were to have it there, how it helped lead to a revitalization of that neighborhood, these are the kinds of things that we’re talking about, those sort of side effects. I could talk to you all day, Stacy. I really enjoyed this conversation. I wanted to make sure that people are thinking about this.

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. 

Stacy Mitchell: Thank you, Chris.


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Audio Credit: Funk Interlude by Dysfunction_AL Ft: Fourstones – Scomber (Bonus Track). Copyright 2016 Licensed under a Creative Commons Attribution Noncommercial (3.0) license.

Photo Credit: By ChadPerez49 [CC BY-SA 4.0], from Wikimedia Commons.

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Nick Stumo-Langer

Nick Stumo-Langer was Communications Manager at ILSR working for all five initiatives. He ran ILSR's Facebook and Twitter profiles and builds relationships with reporters. He is an alumnus of St. Olaf College and animated by the concerns of monopoly power across our economy.