Amazon’s $13.7 Billion Real Estate Bet

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At a cost of roughly $30 million per store, the smart money is on Amazon’s surprise takeover of Whole Foods being about more than just food.

On Friday, the online retailing giant shocked just about everyone by announcing by buying upscale grocery chain Whole Foods for $13.7 billion in cash. Shopping center REITs slipped, grocery stocks tumbled and the retail complex at large struggled to understand what just happened. The term “seminal moment” was bandied about more than once.

Immediately and unsurprisingly, the pundit class rushed to criticize the deal, characterizing it as Amazon’s acknowledgement that its foray into the grocery business had failed. Academics questioned how Amazon’s culture of ruthless efficiency and cost-cutting would mesh with Whole Food’s jovial, team-centric corporate culture and upscale, frill-laden shopping experience. Others remarked how acquisitions of unrelated businesses rarely proved profitable for the buyer.

As the day wore on and the myriad of industries impacted by the deal considered its impact, cooler and more insightful minds prevailed. The Wall Street Journal, citing logistics experts, noted that Whole Foods’ more than 430 locations would increase Amazon’s neighborhood network by more than five times. Given Whole Foods’ ubiquity in upscale urban and suburban markets, Amazon captured irreplaceable distribution infrastructure in close proximity to America’s wealthiest consumers.

As one supply chain consultant put it:

“Setting aside food, the larger opportunity to build out what many refer to as the final mile to the consumer is now insight. Will these locations become mini-fulfillment centers to help execute local deliveries of not only food but other items? Will these locations become hubs for customer pickup, decreasing some traditional transportation last mile costs? Or will they simply remain as they are today? Which is very hard to believe.”

The most exciting part of this acquisition isn’t the idea it getting easier for wealthy people to get overpriced food delivered to their doorsteps. Rather, one of the top innovative companies on the planet is making a multi-billion dollar bet that controlling large warehouses close to population centers is the future of retail.

The implications of this notion, especially when layered on top of dynamics already in place in that market segment, are remarkable. Will competitors like Google follow suit? Is Trader Joes next? What other national brands occupy underutilized warehouse space in key strategic locations? Will developers start down-zoning sites to build industrial instead of multifamily or office?

Retail brands are shuttering stores and shedding real estate at a historic pace. Malls are dying in droves. Experts have already decided that brick-and-mortar is dead and online is the future of retail. Which of course it is. But it’s telling that hip new retail brands like Bonobos and Warby Parker, are opening physical locations. And now Amazon buys Whole Foods.

The easy trade is betting that tomorrow’s consumers will want everything delivered the same day. The real money will be made figuring out how to serve those that think same day isn’t fast enough.