Whole Risk, Whole Opportunity: The ESG implications of Amazon’s Whole Foods Acquisition

Posted on October 3, 2017

David Parsons
David Parsons
Analyst, Research Products Sustainalytics

Amazon’s expansionism has brought it into multicategory retailing, consumer electronics, cloud computing, logistics and media production. Now, with its recent USD 13.7bn acquisition of Whole Foods Market, it strides into brick-and-mortar grocery retailing. As Amazon expands in all directions, so does the frontier of its ESG risks and opportunities. How do grocery stores fit into Amazon’s customer-obsessed technocracy? And how will it use the Whole Foods brand, built on a foundation of upmarket ethical consumerism?

Brick, Mortar and Cloud

Amazon’s new customer-facing physical presence will bring new opportunities as well as potential issues. Amazon will certainly bring its supply chain expertise to bear on the existing Whole Foods system and there are immediate synergies with the nascent AmazonFresh subsidiary. Groceries chosen by customers online via AmazonFresh can be pre-packaged for pickup at Whole Foods locations. In-person customer interactions may also help in product categories where customers prefer to inspect and handle the items. This includes fruits and vegetables, but also expensive, aesthetic or bulky items like electronics and kitchen appliances.

Nevertheless, Amazon must absorb and streamline this brick-and-mortar footprint. It must contend with energy consumption, food waste, and human capital issues, among others. Due to a large but low-wage and high-turnover workforce, the food retailing industry has systemic human capital risks and a higher rate of controversy (see chart below). This merger expands Amazon’s employee base by over 35%, but the company brings a history of labor disputes and criticism among its warehouse and office staff. Prior to the merger’s finalization, the United Food and Commercial Workers Union added its own concern, expressed in a letter to regulators. Currently, it is unclear whether Amazon has the human capital management systems in place to manage the added risks.

Severity of Labor Controversies among Public US Companies (n=3,000)

Source:Sustainalytics Research. Controversies are assessed on a 0 to 5 scale, where “0” indicates no controversy and “5” indicates extremely severe controversy.

A New Value Chain for Rent

As Amazon masters its own operations, it commodifies internal solutions as new products and services. Today, companies can buy into Amazon’s own logistics network (Fulfillment by Amazon), cloud computing (Amazon Web Services) or artificial intelligence (Amazon Lex). These hybrid internal/external business services drive Amazon’s efficiency and add new revenue streams. This strategy begs the question: How will Amazon parcel brick-and-mortar retailing into saleable business services? For example, Whole Foods shelf space may become an extended feature of Fulfillment by Amazon, with more dynamic competition among third-party brands. With its business services, Amazon has made customers out of competitors. As it envelops more markets and more stages of the value chain, Amazon increases its risk of violating anti-competition regulation. In the book industry, Amazon has faced antitrust scrutiny from the US, UK and Germany. It will need to expand carefully to avoid running up against anti-competition regulators in its new grocery market.

Bringing Ethics to Market

The Whole Foods brand is built on a public perception of ethical conduct, which can be quickly eroded by controversy. Current Whole Foods systems do not appear to fully manage this risk, as it discloses little information on operational ESG programs. Its management focus is on products and customer experience, with little information published on in-house risks such as waste management, carbon emissions and human capital management. Even with this product focus, Whole Foods was overtaken in the organic food segment by Kroger in 2017. Simultaneously, Whole Foods’ ethical brand amplifies the reputational benefit gained by strong practices and can serve as a vehicle for future social and environmental ambitions. Amazon has purchased a brand that is vulnerable to ESG risks but well-positioned to seize upon the market trend toward more sustainable consumption.

In this new market, wielding an ethically-oriented brand, Amazon has many avenues toward new growth and value. But both companies bring pre-existing ESG risks, which have the potential to intensify under the scrutiny of conscious consumers and wary regulators.

Recent Content

scope 3 emissions shareholder voting

Investors Seek Meaningful Scope 3 Emissions Targets to Evaluate Climate Transition Plans

Climate concerns continued to dominate proxy voting in the 2022 proxy season. With more clarity on sectoral commitments required to achieve the global net zero goal, shareholders’ requests have become noticeably more specific. A larger number of resolutions asked companies to adopt and report on emissions reduction targets and transition plans that reference the latest forward-looking guidance.

Biodiversity COP15 Sustainalytics

Post-COP15 Outlook: Evolving Investor Responsibilities in Biodiversity

Awaiting COP15’s Global Biodiversity Framework negotiation outcomes, financial market participants could face new regulatory pressure sooner than expected to integrate biodiversity assessment into their investment, decision-making processes.

2023 Outlook ESG

In 2023, Expect Europe’s Asset Managers to Gain Ground on ESG Regulations, Morningstar Sustainalytics President Says

Sustainalytics at COP15 Biodiversity Conference

Danish Delegation Engages Sustainalytics’ Biodiversity Expert, Enabling Front Row Access to COP15 Negotiations

Finance Day within the U.N. Biodiversity Conference (COP15) is fast approaching, and Morningstar Sustainalytics’ team members will be in attendance, each focusing on different investor biodiversity considerations related to active ownership.