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B. Tom Hunsaker
Mary B. Teagarden
William E. Youngdahl

Amazon: Merging Digital and

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Physical Worlds for Market Growth
Physical-world retailing is a cagey business.
Jeff Bezos, CEO, Amazon

Retail shopping models had long been considered binary—either e-commerce or brick and mortar. In practice,
the industry involved a long spectrum with pure e-commerce on one end and pure brick and mortar on the other

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end. In between, many diferent models were emerging, like ordering online and picking up in-store (Walmart’s
Grocery Pickup1), shopping in-store and ordering online (Warby Parker2 and Bonobos3 made their name in this
space—largely facilitating the showroom behavior of consumers), digitally enhanced physical shopping (several
companies hold patents in this space with virtual reality promising to push this model), and many others.

By 2019, Amazon was the world’s most valuable online retailer exceeding $1 trillion (USD).4 So, when
the company announced the purchase of Whole Foods and further committed to the expansion of Amazon Go
store locations, many questioned the strategic value.5 Why would a pioneering company so clearly successful in
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the digital realm seek to enter the more traditional brick and mortar space?

Amazon
Amazon was founded in 1994 by Princeton graduate and former Wall Street vice-president, Jef Bezos, who quit
his job and moved to Seattle to participate in the internet boom of the time. On the early cusp of the digital
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economy, Bezos launched Amazon.com in 1995 to sell books online—fueled by the notion of the “virtual”
warehouse—allowing for a wider selection without the cost of extensive inventories. Envisioning the internet’s
broader reach, shortly thereafter Bezos created a list of more than 20 products he thought could be successfully
sold online. Te company’s IPO in 1997, under the symbol AMZN, further capitalized the expansion of book
sales and allowed the company to market other merchandise. Over the next decade, Amazon prioritized volume
and market share growth over proftability, a strategy supported by patient investors. By the early 2000s, Amazon
had developed the reputation for convenient online shopping featuring a vast array of products.
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2013 marked the beginning of a meteoric valuation climb for the company, fueled largely by growing global
interest in the digital economy and Amazon’s ability to leverage its online retail position to support ancillary
digital oferings in media, cloud computing, and more through Amazon web services, and a bevy of other sectors.
In addition to price accessibility and sales growth, the company focused extensively on customer convenience
1
https://www.sec.gov/Archives/edgar/data/1018724/000119312507093886/dex991.htm. Retrieved 12 May 2019; https://
www.produceretailer.com/article/news-article/walmart-snagging-these-shoppers-grocery-pickup.
2
https://www.warbyparker.com/. Retrieved 4 June 2019.
3
https://bonobos.com/. Retrieved 7 June 2019.
4
NASDAQ: AMZN. Retrieved May 14, 2019.
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5
wholefoodsmarket.com/news/amazon-and-whole-foods-market-announce-acquisition-to-close-this-monday-wil. Retrieved
January 10, 2019.

Copyright © 2020 Tunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. Tis
case was written by Professors B. Tom Hunsaker, Mary B. Teagarden, and William E. Youngdahl for the sole purpose of providing
material for class discussion. It is not intended to illustrate either efective or inefective handling of a managerial situation. Any
reproduction, in any form, of the material in this case is prohibited unless permission is obtained from the copyright holder.

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 and loyalty. Amazon Prime provided unlimited two-day purchase deliveries and a range of ancillary services

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(e.g., online movie viewing), frst in the United States and then in a variety of other countries for an annual fee.

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Experiments with aerial drones and other proprietary delivery services sought to reduce the company’s input
costs and enhance customer value.

Despite Amazon’s online retailing success, the company depended largely on a single modality that
constrained the overall customer experience and potentially limited growth. For example, some existing and
potential customers liked to hold a physical book before buying it. Others were not comfortable with packages

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being left at unsecured doorsteps. Home security videos of package-grabbers appeared frequently on social media,
especially during holiday seasons. Additionally, while some items, like food, could be delivered to homes, many
customers liked the option of being able to touch and smell their fresh produce before buying it. But it wasn’t
clear if experimenting with diferent modalities could cause Amazon to lose any of its highly focused and well-
honed advantages in online retail.

Amazon Books

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Amazon opened its frst Amazon Books retail store (see Exhibit 2) in Seattle in November 2015. Te company
implemented some interesting changes from traditional bookstores. For example, books were displayed face out
instead of showing just the spine. Placards listed the average Amazon customer rating for each book. To some,
this venturing into bricks-and-mortar bookstores served as an irony since it was entering the very market that
many accused it of destroying with its online bookselling business.

Amazon Prime members could use their Prime mobile app to scan the front of any book to reveal the
Prime pricing for the book that was generally lower than the retail pricing for non-Prime shoppers. Te company
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hoped to merge technology with elements of the online buying experience, such as ratings, that had become so
familiar to its online retail customers.

Amazon Hub Locker

Amazon Hub Locker resulted from friction the company perceived in doorstep delivery, with a particular focus
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on the United States. For some, largely business-to-consumer customers, doorstep delivery was not always the
most convenient, and certainly not the most secure, buying experience. Random deliveries largely conducted
during the day were challenging for many who worked or who otherwise couldn’t be available to receive their
package. Leaving parcels unprotected on doorsteps was also problematic, especially in large apartment complexes
that experienced signifcant foot trafc and transient populations. By installing an Amazon Hub Locker in a large
apartment complex, residents could enter a secure code to access a locker from which they could retrieve their
packages. While the Hub Locker was a physical facility, it was completely integrated with Amazon’s cloud-based
applications that drove its retail business.
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Describing their Amazon Locker ofering, the company outlined:

Amazon Hub Locker provides you with a self-service delivery location to pick up and return your
Amazon.com packages. Lockers are currently available in a variety of locations throughout the U.S.
Instead of delivering a package to your home or business address, you can select an Amazon Hub
Locker location and pick up your package at a time that’s convenient for you. Once your package
is delivered to the locker location, you’ll receive an e-mail notification with a unique pickup code
that includes the address and opening times for your selected locker location. When you arrive to
collect your package, enter your pickup code or scan the barcode using the barcode scanner and
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follow the instructions on the screen. All packages delivered to Amazon Hub Lockers must be picked
up within three days. If you’re not able to collect your package within this timeframe, the package
will be returned to us for a refund.6

6
https://www.amazon.com/gp/help/customer/display.html?nodeId=201530900. Retrieved 25 May 2019.

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 Amazon Go

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Amazon Go, founded in 2018, reimagined the convenience-store customer-buying experience in altogether new

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ways by introducing physical stores with self-serve virtual check out (see Exhibit 3). Employing Just Walk Out
Shopping Technology, Amazon Go introduced customers to the ability to completely bypass checkout lines. A
team of Amazon executives tested the Go store concept in a 15,000-square-foot mock supermarket in a converted
rented warehouse in Seattle. Tey then introduced the idea to Amazon founder Jef Bezos in 2015. Te frst real
Go store, open only to employees as of December 2016, provided opportunities to test and debug the Go store
model. Amazon did not open the store until January 2018. Te announcement of the frst store opening led to a

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2.5% jump in Amazon’s stock price. Tis change increased Jef Bezos’ net worth by $2.8 billion in a single day.7

Bezos commented, “With Amazon Go, we had a clear vision. Get rid of the worst thing about physical
retail: checkout lines. No one likes to wait in line. Instead, we imagined a store where you could walk in, pick up
what you wanted, and leave.”8 To achieve this goal would require signifcant fusion of Industry 4.0 capabilities,
including computer vision, AI deep learning algorithms, and sensor fusion solutions to achieve the level of
automation required for self-service checkout that would be secure for both customers and the company. Sensor

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fusion combined data from cameras and scales and bar codes to verify purchases. Amazon developers created the
Amazon Go app for iOS and Android mobile devices. Te app served as the primary payment method. It was
easy for app users to add family members to their account so they could make purchases.

One industry analyst for RBC Wealth Management described Amazon Go as “Almost like the experience
of shoplifting, except it’s legal, and you don’t need to hide the stuf in your jacket… Its in-store technology
enables shoppers to have a very efcient and pleasant shopping experience… Te overall opportunity is huge.”9
By Spring 2019, the company had 18 Go store locations in Seattle, Chicago, San Francisco, and New York City.
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Amazon 4-star
Amazon opened its frst 4-star store (see Exhibit 4) in September 2018. Te concept driving 4-star stores was to
promote items sold online at Amazon.com. Items had customer ratings of 4.0 or above, or they were top sellers
or new and trending items. Item categories included Amazon devices, consumer electronics, kitchen, home,
toys, books, and games.10
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Te 4-star stores provided customers with the opportunity to have a physical experience that closely
mirrored online shopping. Tey experienced the beneft of social media-like customer ratings while being able
to see and touch the products. Additionally, Amazon Echo was prominently displayed in the stores. Customers
who purchased Echo were likely to order items online using Alexa.

As 4-star stores proved to be popular with its customers, Amazon decided in 2019 to close its Pop-Up
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stores. Tese stores were actually standalone kiosks that the company used to sell Amazon devices such as Fire
tablets, Echo speakers, and Kindle readers. An Amazon spokesperson stated, “After much review, we came to
the decision to discontinue our Pop-Up kiosk program and are instead expanding Amazon Books and Amazon
4-star, where we provide a more comprehensive customer experience and broader selection.”11

Whole Foods
Despite these inroads into fusion of physical and digital retailing, it was clear to Amazon leadership that they had
more retail market share to gain. In his 2019 letter to shareholders, Amazon CEO Jef Bezos described this gap:
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7
https://www.investopedia.com/news/jef-bezos-just-got-28-billion-richer-thanks-amazon-go/
Retrieved on December 10, 2019.
8
https://www.cnbc.com/2019/04/12/amazons-jef-bezos-most-us-sales-still-in-brick-and-mortar-stores.html Retrieved
December 2, 2019
9
https://www.forbes.com/sites/andriacheng/2019/01/13/why-amazon-go-may-soon-change-the-way-we-want-to-
shop/#4dbc86a76709. Retrieved May 26, 2019.
10
https://blog.aboutamazon.com/shopping/amazon-4-star. Retrieved December 9, 2019.
11
https://www.nytimes.com/2019/03/06/technology/amazon-pop-up-stores-closing.html. Retrieved December 4, 2019.

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 Amazon today remains a small player in global retail. We represent a low single-digit percentage of

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the retail market, and there are much larger retailers in every country where we operate. And that’s
largely because nearly 90% of retail remains offline, in brick-and-mortar stores.12

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Whole Foods came on the scene during a time when the natural food industry was more novelty than
mainstream. Founded in Austin, Texas, the company was among the frst to apply the supermarket format to
natural foods when it launched its frst Whole Foods Market location in 1980. By 1984, the company had
expanded beyond the Austin market, opening stores in Houston and Dallas.

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Next came regional expansion in 1988, with an acquisition in the New Orleans market, followed by a series
of acquisitions of boutique natural foods retailers that would broaden the company’s footprint from California
to Massachusetts and many locations in between. By the early 2000s, the company had become a household
name for those who valued natural foods, and was fnancially positioned to take on dense urban markets like
Manhattan, in New York. International expansion would soon follow with the company’s frst stores in Canada
opening in 2004—again fueled by an acquisition strategy.13

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As Whole Foods continued to develop natural foods market share in the United States and beyond,
Amazon’s appetite for quickly gaining a deep, brand-compatible physical store presence also grew. Te company
had been chasing the online grocery space since 2007. Returns for these eforts were largely unrequited. Te
grocery business itself is challenging—disproportionately rewarding the most operationally savvy and capital-
rich parties and leaving others in its wake due to the segment’s tremendous volumes but razor-thin margins. Te
advent of new modalities with unclear proftability models and other obstacles compounded the challenge, and
Amazon was no exception.
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Many were surprised by Amazon’s acquisition of Whole Foods in 2017, not because Whole Foods wasn’t
a good company and not because the magnitude of the grocery business wasn’t an attractive target, but because
this seemed to diverge from Amazon’s undeviating commitment to digital customer interfacing, at least prior
to the acquisition. To describe the reasons for the purchase, Jef Bezos sent an internal memo throughout the
Amazon ranks:
Today is a significant milestone in the evolution of the Amazon brand. Our offer to purchase Whole
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Foods will finally consolidate the largest online and offline retailers where consumers end up spending
way more than they intended.

Our corporate cultures are perfectly aligned. The New York Times revealed that every Amazon
employee has cried at their desk, and I personally made a Whole Foods employee cry when they
couldn’t correctly identify their process for ensuring single-source coffee beans throughout the
roasting process. It was an uncomfortable 38 minutes for both of us, but I think an experience so
many of you can relate to.
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Improved Echo functionality. Whole Foods has maintained a laser-like focus on organic foods and
sustainable facilities, and I’m excited to bring that same vision to Echo. Starting next week, when
customers ask their Echo to order non-organic food products, they’ll receive a 12-minute lecture on
the benefits of organic and local-sourced products, while our top-notch product-matching software
will send them the closest available organic item. Users on our website will find the “Customers Also
Bought…” section, replacing unhealthy items with notes such as, “Cookies That Went Straight to
Their Thighs” and “Beef Produced by Clear-Cutting Rainforest.” Needless to say, those products will
not be available for purchase. I am beyond excited by the possibilities of this merger moving forward,
and I hope the team feels the same. The combination of our two companies will account for over 85%
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of all hipster purchases in the United States. I’m looking forward to capturing the remaining 15%.14

12
https://ir.aboutamazon.com/2019-annual-meeting-shareholders. Retrieved May 17, 2019.
13
https://www.wholefoodsmarket.com/company-info/whole-foods-market-history. Retrieved February 22, 2019.
14
https://www.mcsweeneys.net/articles/jef-bezos-email-to-employees-on-amazons-purchase-of-whole-foods. Retrieved
January 15, 2019.

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 Beyond the “ft” benefts outlined in the Bezos internal memo, there were potentially even more strategic

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and disruptive benefts.15 Te Whole Foods acquisition created the potential for further expansion of AI (artifcial

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intelligence) and the IoT (internet of things) into retail grocery shopping. AI would provide valuable customer data
enabling heightened customer insights that could guide Amazon’s use of bots and other automated mechanisms
to serve customers more efectively. Additionally, the company’s executives believed AI technology would open
new services and revenue streams, including providing a more detailed insight into the history of the food we
buy, such as food security dynamic like where the food came from, how long it has been in transit, and storage
temperatures. Te same types of AI that had already been successful in online retailing could dramatically change

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customer behavior tracking and personalization. By applying beacons, geofencing, visual recognition, and other
IoT technology, Amazon could make highly personalized Whole Foods promotion recommendations while a
customer was in the store or even nearby. IoT opportunities would be enhanced as well through close integration
with Amazon’s IoT products—Alexa, Echo, and Dash—thus enhancing the Amazon ecosystem.

By spring of 2019, Amazon had 479 Whole Foods Markets stores (see Exhibit 4). Tis acquisition, as opposed
to methodical build and testing from the ground up, represented a step-function increase in market share, yet it
also required signifcant efort to integrate an existing business with so many stores into the Amazon ecosystem.

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Next Steps
Amazon’s executives knew that growth would depend on increasing share of many large markets. Whole Foods was
a compelling experiment, given the then $700 billion grocery industry. Leveraging Amazon’s digital capabilities
while enhancing physical customer experiences would make the grocery industry a feasible target and expand the
business models that Amazon could consider. But seeing the opportunity was diferent from delivering results.
Amazon would need to not only acquire or build physical retail assets, but also develop the related supply chain,
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capabilities, and mindset shift associated with no longer being an exclusively digital company.

Company executives would also have to contemplate the seemingly fne line between enhancing the
customer experience and testing the limits of customers’ desire for privacy. For example, in 2017, the company
felded a patent for a technology that enabled Amazon to identify a customer’s internet trafc when they accessed
one of their store’s WiFi networks and sense when the user was trying to access competitor websites. Tis would
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allow Amazon several options. Tey could shut down or slow access to the site—precluding customers from
comparison shopping. Tey could redirect customers to a site of the company’s choosing. Perhaps a message
could be sent to a store attendant prompting her to assist the customer. Amazon could even use this technology
to send instantaneous ofers or discounts to the customer via text or other method.

Anchored in the digital with increasing physical sales modality ambitions, Amazon needed to continue to
build, test, and deliver a series of strategic bridges to link the digital and physical domains. But would the fusion
of digital and physical retail worlds make customers feel uncomfortable with the degree of control Amazon
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would have over their buying intentions and choices? How could Amazon reasonably predict success for each
interaction expansion?
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15
https://venturebeat.com/2017/10/04/amazons-acquisition-of-whole-foods-will-bring-ai-technology-to-grocery-stores/.
Retrieved November 1, 2019.

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Exhibit 1. Amazon Locker Homepage Description

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Source: https://www.theverge.com/2015/11/2/9661556/amazon-books-frst-
physical-bookstore-opening-seattle. Retrieved December 6, 2019.

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Exhibit 2. Amazon Books Store
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Source: https://www.theverge.com/2015/11/2/9661556/amazon-books-
frst-physical-bookstore-opening-seattle. Retrieved December 6, 2019.
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Exhibit 3. Amazon Go Homepage Description

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Source: https://www.amazon.com/b?ie=UTF8&node=16008589011.
Retrieved December 3, 2019.

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Exhibit 4. Amazon 4-star Store

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Source: https://www.amazon.com/amazon-4-star/b/?node=17988552011.
Retrieved December 6, 2019.

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Exhibit 5. Whole Foods Homepage Featuring
Amazon Prime Service
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Source: https://www.wholefoodsmarket.com/amazon/prime. Retrieved December

8, 2019.
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