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Walmart just proved why Amazon had to buy Whole Foods

Walmart’s (WMT) third-quarter earnings crushed expectations.

And a key area of growth for the company was its food business, which had its strongest quarter in almost six years. CEO Doug McMillan said the company’s fresh meat, bakery and produce segments “lead the way” in this segment during the quarter.

Walmart employees cheer at the Walmart U.S. associates meeting in Fayetteville, Arkansas.. REUTERS/Rick Wilking
Walmart employees cheer at the Walmart U.S. associates meeting in Fayetteville, Arkansas.. REUTERS/Rick Wilking

Online sales were also a boon for the company during the quarter, with grocery boosting performance here as well. Walmart CFO Brett Biggs said, U.S. eCommerce growth was up 50% in the third quarter with Walmart.com, which includes online grocery sales, are “responsible for the majority of the growth in the period.” (Thus, it is core Walmart.com, and not its Jet.com unit, where Walmart is seeing most of its online sales grow.)

And the success that Walmart is seeing in both its online business and grocery segments illustrates some of the strategic impetus behind 2017’s most high-profile acquisition — Amazon (AMZN) buying Whole Foods.

This holiday season, you could step into a Whole Foods for some organic bananas and step out with a couple of Echo speakers instead.
This holiday season, you could step into a Whole Foods for some organic bananas and step out with a couple of Echo speakers instead.

Amazon’s physical retail bet

Back in June, Amazon acquired the high-end grocer for $14 billion, the company’s biggest acquisition ever. The basic outline of why Amazon bought Whole Foods is fairly straightforward — the company got hundreds of grocery stores located in high-income zip codes which could jumpstart its lagging grocery business, with these stores also serving as small warehouses to help its last-mile delivery operations.

After the deal closed, Amazon slashed prices on a number of items at Whole Foods, which led to an immediate increase in foot traffic, according to data from Thasos Group. This data also showed that many of these new customers came primarily from Walmart, which accounted for almost a quarter of Whole Foods’ increase in the week following these new lower-priced initiatives.

The success of Walmart in the wake of these customer shifts and Amazon’s new push in groceries, however, shows why Amazon felt the need to go compete on Walmart’s turf when the dynamic between these companies has largely been the inverse. And this offers another explanation for the strategy behind Amazon’s Whole Foods buy — Amazon did not buy Whole Foods because it wanted to be in the grocery business, but because it wanted to be in the physical retail business.

Until recently, Amazon had no physical retail presence to speak of, meaning its transactions were entirely initiated online and completed with a delivery.

In contrast, Walmart’s eCommerce channel includes sales done online and sent to a buyer, as well as those initiated online but picked up in-store, online grocery sales, and its suite of other brands housed under its eCommerce unit led by Marc Lore. But Walmart’s online shopping arm is not so much an addition to its sales efforts as it is a supplement; buying things online through Walmart makes you more likely to buy something in-store at Walmart.

Walmart’s most recent quarterly results, which include the week after Whole Foods slashed prices, show that while Amazon has become synonymous with online shopping in the U.S., Walmart’s efforts to challenge that preeminence are paying off. And a lot of this online success, perhaps counterintuitively, is anchored in Walmart’s stores.

Walmart store traffic surged in the third quarter

In addition to its strong online results, Walmart’s same-store sales rose 2.7% in the third quarter, up from a 1.2% increase in the same quarter last year, which traffic rose 1.5% against last year’s 0.7% increase. At its Sam’s Club wholesale stores, traffic rose 3.6% in the third quarter of this year against a 0.5% decline seen last year.

Walmart is able to use its stores as points of contact with customers in the way that an online retailer might try to use an email blast as a reminder that they are still there, ready to sell you stuff. And the company’s traffic figures back this up.

Except that Walmart’s stores are not just email blasts reminding customers they exist but places you go to also buy other things. Which makes the in-store pick-up from an online sale more likely to lead to an additional purchase, or if nothing else keeps the customer aware of what else is available at Walmart.

And that’s why Amazon now has bookstores—and why Amazon bought Whole Foods.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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