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Whole Foods Market

Season 1, Episode 39

ACQ2 Episode

June 20, 2017
January 6, 2019

Ben and David are once again live on the scene, this time covering the biggest disruption in grocery since... well, sliced bread: Amazon's $13.7B purchase of Whole Foods Market. We place this deal in context by diving deep into the long, intertwining history of grocery, tech and Amazon, from the infamous dotcom flameout Webvan (domain name now owned by Amazon) to its much more successful progeny Kiva Systems (acquired by Amazon in 2012) to current Silicon Valley unicorn Instacart (founded by former Amazon logistics engineer Apoorva Mehta). One thing is clear: for Amazon and Jeff Bezos, realizing the longterm vision of the Everything Store truly means building the everything store.

Topics covered include:


The Carve Out:



We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
June 20, 2017

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
June 20, 2017


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
June 20, 2017

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
June 20, 2017

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
June 20, 2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
June 20, 2017

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
June 20, 2017

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
June 20, 2017

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
June 20, 2017

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben:                 Yeah, completely agree. Podcasting is the new groceries.

David:              Yeah. Well, good thing we’re here on the scene.

Ben:                 Welcome back to Episode 39 of Acquired, the podcast about technology acquisitions and IPOs. I’m Ben Gilbert.

David:              I’m David Rosenthal.

Ben:                 And we are your hosts. Today, we are coming in hot with a just-announced Amazon acquisition of Whole Foods for $13.7 billion all in cash.

David:              Ooh, are we ever...

Ben:                 We were not planning on doing an episode today but David and I woke up, we saw the news and absolutely could not resist.

David:              We live for this.

Ben:                 So here we are. We do. It’s 4:00 PM PST on Friday, June 16.

David:              The day the acquisition was announced this morning.

Ben:                 And hot takes flying all over the internet. David and I do not purport to have any of the answers but we do have hot takes of our own. So, in true Acquired fashion we will probably be wildly speculative. We have no idea what they’re going to do with this acquisition and we certainly cannot give it a grade that we feel very confident about but is going to be real fun to talk about.

David:              Before we dive in though, important, important announcement. So Ben’s birthday is coming up this week and if you want to give him a present like me, you should leave Acquired a review on Apple Podcasts. See what we did there. No, seriously.

Ben:                 David gets some of my birthday present too, apparently.

David:              I’ll write your review then. But no, seriously, Acquired is growing a lot and we have some amazing guests coming on this summer and that’s possible because of the growth and the way to keep the growth going is through Apple Podcast reviews. So, if you have a minute, please leave one. We really, really appreciate it and thanks for being a listener.

Ben:                 We do. And now I get to skip my section where I normally ask for Apple Podcast reviews.

David:              My present to you is giving you a break from this.

Ben:                 Perfect, perfect. Well, listeners, do know that we have a Slack. We’re 750 strong now and it was blowing up today. So if you’re a new listener to the show and you want to talk about any awesome news that is dropping on the day that it drops in technology, join us, Acquired.fm. You can join the Slack and be part of the discussion.

Our sponsor for this week is Silicon Valley Bank. We have with us today legendary SVB-er, Dan Allred. He leads a team of bankers who work with growth stage tech companies in Boston as the market manager. Dan, what interesting trends are you seeing in new companies that are getting funded?

Dan: “I think one of the ones we’re most excited about in Boston is this trend around digital manufacturing. So we’ve just seen a number of companies like Formlabs, Desktop Metal, Digital Alloys, Tulip that are all around rapid prototyping and bringing digital to the factory floor, which is really interesting. And Formlabs, in particular, just hosted an event at the MIT Media Lab which brought analysts from many different banks and financial institutions to cover what’s essentially some startups, so I was really encouraged to see that.”

Interesting stuff. Thanks, and thanks to Silicon Valley Bank. If you are interested in a banking relationship, you can click the link in the show notes or in Slack to get in touch with Dan.

Now, David...

David:              Let’s do this. So for the show today, we are of course going to do history and facts, as always. But it’s going to be a little different than usual. One, because we didn’t have the time to do the in-depth research that we usually do into Whole Foods, so it will be a somewhat truncated history and facts on Whole Foods but we’ll still tell some fun stories. But we don’t think that we can actually give kind of the full analysis and treatment of this deal and what it means without looking at a couple other companies too. So we’re also going to talk about Webvan, Kiva Systems, and of course, Instacart which will be a big topic of conversation today and already is in the media given what happened, and Whole Foods being an investor in Instacart.

But so, to start off, Whole Foods was started in 1978 in Austin, Texas by a young man named John Mackey and his then-girlfriend Renee Lawson Hardy. It was originally not called Whole Foods. It was a natural foods store, you know, mostly for hippies which they were in the late 70’s in Austin, and they called it Saferway which was an intentional dig at Safeway.

Ben:                 I have not heard that, but it's awesome.

David:              It was great. John was on a podcast recently and I think it was NPR’s How I Built This. He said that he called it that and they were sort of hoping that Safeway would sue them because then it would be like free publicity, but they were so small and insignificant that Safeway didn’t even notice.

Ben:                 I think I had heard in the past that Whole Foods is this Texas owned company and it’s just shocking. Growing up, we got one in Ohio, I remember thinking like “Oh, this is probably something like San Francisco.” Like, where are they eating like this and where would there be like a hippie commune that would inspire this and keep Austin weird, but shocking that it was in Texas to me.

David:              Well, I mean, as we all know Austin, stereotypes about it are not always true but Austin is definitely a hippie mecca and was in the 70’s even more so. So Mackey kind of basically goes on. He’s still the CEO of Whole Foods many years later, will continue to be under Amazon, it was announced. But he’s basically like the Steve Jobs of grocery stores.

So he dropped out of UT to start the company and he talks about kind of when he was at UT, he sort of had this very Jobs-like experience, you know, like Jobs had at Reed in Portland when he was there for a semester. Mackey kind of didn’t like the structure of college and having to have a major and so he just decided he was going to bum around and take whatever classes interested him, and he ended up...

Ben:                 He’s like exactly the Steve Jobs.

David:              It’s exactly the Steve Jobs experience and he ended up through kind of that route getting involved with a vegetarian co-op on campus. That's where he met Renee and started getting into food and natural foods and whole foods. The two of them had this idea that they should start their own store. So they borrowed $10,000 and then they raised another $35,000 from investors and they start Saferway. They put it in an old building and the store was on the first floor, and then they had a restaurant on the second floor and then they lived on the third floor.

Ben:                 Oh, that is awesome.

David:              Yeah. Super cool. So they do it for a couple of years and it starts really working and they get lots of business and people really love what they’re doing. But of course, because Austin is a hippie town, there are other natural foods markets in town and there’s one called the Clarksville Natural Grocery. That was run by two guys, Mark Skiles and Craig Weller. Mackey, the Whole Foods CEO, kind of admired what they were doing and he approaches them about merging and becoming a bigger store combined together. So they do and then they had to rename the business and they renamed it Whole Foods Market, and thus Whole Foods is born.

Ben:                 It’s funny. We’ve done the other ones that have origins stories in like these small mergers too. You look at Il Giornale and Starbucks, kind of a similar thing.

David:              Very similar here. Mackey’s basically the Howard Schultz and Steve Jobs combined of the grocery business. So they do the merger and then a couple years later they start expanding. First, elsewhere in Texas and then they go to New Orleans and they buy a company there called the Whole Food Company, and then basically they kind of learn that growing through acquisition, there are lots of local natural food stores throughout the country, especially in more liberal hippie areas.

Ben:                 It’s so true. It’s like shockingly true. I did like a little anecdote but I was doing this bike trip up the coast of California last summer and we get into these little towns that had like – it became the running joke of the trip. The little towns that had like 3 or 4 buildings and it seemed like there wasn’t much going on there but have like an incredible natural market. And it is amazing like when you get into these, if those were any bigger, you could totally see Whole Foods just gobbling that up and it being right under their brand.

David:              And that’s really how they grew, by acquiring a lot of those little stores and little chains and then slowly over time turning them into Whole Foods and into the big box store that Whole Foods is today. But kind of as they do that, they’re over the decades they catch the wave of whole natural foods, organic foods. They really help start the organic food wave and publicize it among not just hippies but kind of everybody and especially young people in the American population.

So they keep growing and by the mid-2000s, they’re above a $10 billion market cap, one of the largest grocery chains in America. Then the recession happens in 2008 and the financial crash and the stock craters them but then it kind of goes right back up and growth continues. By 2014, Whole Foods has become the 30th largest retailer – period – in the US. But then over the last couple of years, unfortunately for them, growth kind of stopped. So as of today when Amazon acquired them for the last seven quarters straight, they’ve had declining sales, declining same-store sales and the stock has fallen precipitously.

Ben:                 Huh. Declining same-store sales like it seems like, I mean, this is like the urban Seattle bubble I'm in, but it sure seems like the health food movement is in more full swing than it’s ever been.

David:              Yeah.

Ben:                 People are woke, David.

David:              Yeah. This was really odd to me too. I just don’t know enough about the grocery industry to know it was happening. But the little I was able to read, and this makes sense, is that it was actually kind of mostly growing competition from other stores that are... it could be Trader Joe’s or plenty of other – even regular grocery stores now are offering plenty of natural and organic foods, often cheaper than Whole Foods. I mean, the knock on Whole Foods is it’s expensive.

Ben:                 You totally see that here. I’ve been shocked with Kroger-owned QFC here in Seattle is in the last couple of years really stepped up their game to the point where I can get enough really healthy stuff there where I’d actually, you know, I can totally see why the same-store sales will be declining for Whole Foods.

David:              Yup. So the stock has been under a lot of pressure for the last couple of years and actually there was an activist hedge fund, Jana Partners that I believe ended up getting board seats and has been kind of really pushing the company to take a corporate action, meaning sell itself.

Ben:                 This is totally interesting. So last fall, Amazon was – at least this was I think a Bloomberg story – that it was reported that Amazon was considering buying Whole Foods but then Jana stepped in as an activist investor and that calmed down for a little while. And there’s been other talks recently, we’ll get into the Albertsons stuff, that Albertsons was considering a takeover bid more recently, but on this Jana Partners thing, Jana acquires I think it was 8.3% of Whole Foods last fall and then is able to flip it for the premium that they got to Amazon today. And Amazon was interested before Jana stepped in. So I’d love to know that story of, you know, how did Jana manage to make that happen when Amazon knew the price was only going to go up when that happened.

David:              Yeah. Well, nothing drives acquisition interests like other acquisition interests and viable alternative paths, too. So we don’t know now but I'm sure lots of stories will come out in the coming months. But yes, so as you mentioned back in April it was rumored that Albertsons was looking at buying a company and then today, the big announcement, that Amazon finally would acquire the company for $13.7 billion in cash, so $42 a share which is 27% premium to where the stock closed yesterday. And on a sort price to earnings multiple ratio of 31 versus kind of 14 ½ which is where the average grocery store is trading these days, which I assume that’s kind of how grocery chains trade. But like disclaimer, we don’t know much about the industry.

Ben:                 Well, David, this is fascinating. So I just had this conversation with a coworker and I was doing some of the research for the show. The annual sales last year for Whole Foods was 15.6 billion. And I was like, “Wait a minute.” So the market of this grocery store is actually less than a single year of revenue which to us in the tech business, like you get a 2x, 3x, 4x, 10x multiple on revenue and if you look at the grocery store business, like apparently not the case. And I think actually retail all up, I heard another stat when I was talking to someone who’s kind of in-the-know about this that boutique retail actually, the general valuation for that is around a quarter of your annual sales. So really, it’s a totally different ballgame than we’re used to covering.

David:              And that just comes down to margins, right? I mean, the margins in retail generally are tiny. I mean, Amazon I believe trades at a much lower revenue multiple than other tech companies because it is a retail business and has lower margins, and grocery is like razor, razor thin margins. Makes Amazon look like a software business.

Ben:                 Yeah. The other interesting thing, so you mentioned that 27% premium. Listeners, David and I were chatting with our friend who’s kind of in-the-know before the show today and mentioned that Whole Foods had been aggressively pursuing a sale six months ago after Jana Partners came in and their main intention was to slim operations or streamline operations, which I don’t really know how much you can do in the timeframe from when they took that position until now, so I can’t really speak to if that actually happened. But they were aggressively looking for a seller for the last six months and it’s fascinating to see like 27% premium over where they’re trading the public markets, it's in the range of what you would expect from these things but it’s certainly on the high end and it’s really interesting and certainly implies that there was a tremendous amount of competitive pressure that even when they’re looking to sell so hard, they still had enough leverage to set that sort of a premium.

David:              Well, and it speaks to what Amazon can do with the business that nobody else can. So let’s put a pin in that for a minute, we’ll come back to Whole Foods of course but we want to talk about these three other companies quickly that are pretty key to the story. So first is the infamous Webvan, the brunt of all dot com jokes back in the day. This company was founded in ’96 by Louis Borders who is the same Louis Borders who was cofounder and CEO of the Borders Bookstore.

Ben:                 No way! I never knew that.

David:              Yeah. All of the intersections across this whole story between with Amazon at center and books and retail, like it’s all the same people and it’s really key. I think this is something that hasn’t been talked about yet in the few years since the deal was announced in the press. But like to really understand what’s going on here, you have to understand this background. So, Borders started, Louis Borders, it was a separate company from Borders the bookstore, but he started Webvan in ’96. Immediately, he was a superstar. Raised capital, raised about $10 million. He invested a third of it, and Benchmark and Sequoia each invested the other third in ’97. Sequoia later put in another 50 million. SoftBank put in another 160 million quickly after that. And Goldman-Sachs put in another 50 million. This is all very quickly and kind of ’97 and ’98, and what the company was doing was delivering groceries to people’s homes, Webvan (grocery van). And so they started in the Bay Area but then even before they’d really prove that it was working in the Bay Area because they never proved it really worked anywhere, they immediately started investing all this capital rollout across the country. I mean, these were the go-go dot com days that we talked about in the Amazon IPO episode. So Amazon was of course watching this with great interest. So the company ended up going public at the end of 1999, so just a couple of years after being founded. They raised another $375 million in their IPO and their market cap at IPO was close to $5 billion. And at this point, the company had done a grand total of just under $400,000 in sales.

Ben:                 Oh, my God!

David:              I mean, this is why this is the cautionary tale about the dot com bubble and pretty quickly the musical chair stopped playing and the company just imploded. So shortly a little over a year after that in the middle of 2001, they file for Chapter 11 bankruptcy, laid off all 2000 employees that they had at that point, and they lost all the money. So basically the whole, you know, nearly billion dollars that they raised, they just burned all of it. And so, this was sort of the initial view that the world had on technology and internet approach to grocery delivery was that you don’t want to be Webvan, like look what they did.

Ben:                 Yeah. I mean, that's like the very long extended and very painful visualization of the hype cycle curve where the value isn’t there yet but the hype is really high. It comes completely crashing down and then it has to slowly build back up to what it once was and may never even reach the hype that it previously hit.

David:              Yeah. But what’s super interesting about it is how much of that DNA from Webvan kind of has still to this day held on to the dream of grocery delivery and sort of there’s been this perception in the world that grocery delivery doesn’t work, that Webvan proved it. But really, what Webvan proved is like how not to run a startup, not necessarily anything about the market. And so there was a company that actually came directly out of Webvan called Kiva Systems. Kiva was founded in 2003, I believe.

Ben:                 Wait, Kiva came out of...? This is incredible. This web is ridiculous.

David:              Yeah. So Kiva Systems which Amazon ends up acquiring in 2012 was founded by a guy named Mick Mountz. And Mick, he had been at Webvan and he was in charge of logistics in the fulfillment centers that Webvan had all around the country. And Webvan knew that the margins on what they were doing were terrible. They were losing tons of money on every order which is why as they grew, they went belly up so quickly. And his job had been to try and turn it around and he didn’t have enough time. But he kind of stayed obsessed with this idea about how could you make a fulfillment center more efficient and be able to eek out better margins out of a fulfillment center.

Ben:                 It’s like Amazon’s whole promise.

David:              This is basically the entirety of Amazon’s retail operations today, is just solving that problem. So Mick founded Kiva and what Kiva did, he saw an opportunity to use robotics to not just replace human labor, and actually what Kiva systems do is they don’t necessarily replace human labor, but they make human labor much more efficient. They’re robots that take pallets and racks that are in fulfillment centers and rather than them just being in the same place and having the employees walk around to pick items from them, actually the robots move the racks themselves to the employees and the employees stay stationary. It’s been a major improvement in innovation and distribution and fulfillment center systems so much so.

Ben:                 Actually, listeners should know this. We’re saying this is a very different Kiva than the Kiva.org that is the sort of microlending.

David:              Yes. Not microlending. Different Kiva. So in 2012, Amazon acquired the company for just under $800 million. Kiva had had customers like Staples and actually both Zappos and Diapers.com were Kiva customers which was probably why Amazon –

Ben:                 Sure. Let’s make the ___.

David:              Yeah. Exactly. Probably why Amazon started to realize after they acquired those companies, the power of Kiva Systems in fulfillment centers, Amazon buys the company and then completely shuts down all other third-party customers and brings all the tech in-house and has since kind of remade, I believe at this point probably the majority, if not all of their US fulfillment centers into Kiva-run fulfillment centers.

Ben:                 Yeah, I’m not sure. I know someone recently that went to work in one of the fulfillment centers that wasn’t Kiva enabled.

David:              Yeah. It may not be... I believe the goal is to convert every FC into a Kiva center but they may not be fully done yet. Because it requires a huge amount of capex and time to make these conversions. So this has become a big, big part of Amazon and it kind of directly came out of the ashes of Webvan, Separately, Amazon acquired the domain name for Webvan. So if you go to Webvan.com today, it won’t resolve. But Amazon actually owns it.

Ben:                 Oh wow.

David:              And they’ve been, as the world knows and we’ve been talking about on this show for a long time, Amazon has been thinking about groceries. They didn’t just wake up this morning and say “Gosh, we should buy Whole Foods.”

Ben:                 Why did they not point that at Amazon Fresh?

David:              Yeah, it’s bizarre. You would think it would just redirect.

Ben:                 They must have been waiting for the Whole Foods acquisition and now it will be the name of the Instacart.

David:              Yeah, totally. Oh, man. That will be just amazing. So back in 2007, even before they acquired Kiva Systems, Amazon started thinking about groceries and launched Amazon Fresh in Seattle. So like us, many listeners of the show, you have lived in Seattle for the last few years and you see Amazon Fresh bags on doorsteps all over the city.

Ben:                 Wait, is Fresh only here?

David:              So for many years, actually for six years, it was only in Seattle and sort of the lesson that they took and many, not just the Kiva founders but many former Webvan employees actually work at Amazon now and are part of Amazon Fresh. The sort of key lesson that they took from Webvan after spending many years analyzing it both on the Amazon side and folks having lived through it is that the problem with Webvan wasn’t that the business didn’t work. It was that they grew way too quickly and because the margins are so small, growing a new market is incredibly costly because you need density and scale to be able to leverage your fixed cost enough and the distribution cost enough to be able to actually turn profit. And so if you grow too quickly, you’ll really quickly flip the boat upside down which is what Webvan did.

Ben:                 Makes sense.

David:              So for six years, Amazon Fresh was just in Seattle. Then in 2013, they launched in LA and then at the end of 2013 they launched in San Francisco. The next year, they went to New York and San Diego and Philadelphia. Basically, the rollout has been accelerating ever since. So they’re in most major US cities at this point. They’re international. They’re in London, they’re in Berlin, they’re in Tokyo, and has really been accelerating as they’ve started to perfect the business at the same time.

Ben:                 It’s funny, but Instacart I think is actually more pervasive in the US.

David:              Yes.

Ben:                 Like I know Instacart just launched in Columbus, I know, and they’re getting into a lot more markets in these sort of major top 10-20 markets in the US.

David:              Well, yeah, foreshadowing the next company being Instacart. But just to wrap up on Fresh, Amazon has been doing a ton of innovation as we’ve talked about around grocery with Amazon Go, the pilot that they’re launching with cashier-less stores in Seattle and pickup. They actually have a location in Seattle now where as a consumer, you can order groceries online, drive your car to a center and then have the groceries put in your car. So they’re doing lots of innovative things kind of around Fresh and around groceries in general even before Whole Foods.

So separately, kind of the third track here is of course Instacart. Instacart was founded in 2012 by a guy named Apoorva Mehta. Apporva had been an engineer at Amazon and in particular an engineer focused on fulfillment centers. He was in Seattle and actually left Seattle, moved down to the Bay Area a couple of years before and started working on a bunch of startup ideas, knew he wanted to start a company. And eventually came back around to this idea of grocery delivery. But he took a very different approach because he knew from the get-go, he talks about this on... I think he was actually also on the NPR How I Built This, he talks about it.

Ben:                 He also has a really great talk at Startup School, how the whole thing got started.

David:              Oh nice. But he knew that Amazon was going to be his main competitor and he had to take a different approach. So with Instacart, as most listeners know, he has said, “Screw this whole logistics thing. That's really hard.” And actually, grocery stores are pretty good at it in terms of keeping the produce fresh and things frozen that need to be frozen and refrigerated and managing the inventory. Why don’t we just build a thin layer on top of it that's just a delivery layer to give the consumers the product experience they want of grocery delivery but just have people come directly to grocery stores, shoppers.

Ben:                 So basically paying that retail premium and then just solving the last mile problem instead of trying to sort of eliminate that middle man.

David:              And do a fully integrated system like Webvan tried to do back in the day and that Amazon has been building now for 10+ years.

Ben:                 As Jeff Bezos would say, “I couldn’t have built Amazon without all the infrastructure already in place. The UPS, the internet laid by the telephone wires, all these things. So now we can build Amazon on top of it.” It’s sort of that same approach but with a different market at a different time.

David:              So Apoorva, he started the company in 2012 and pretty quickly it started growing really fast. They did Y Combinator right after he started the company and then pretty quickly Sequoia invested after that, I believe led the series A. They’ve gone on in the last five years to raise almost $700 million, so approaching Webvan levels of investment. What’s interesting about that in terms of, you know, how it’s all the same people all over again. Mike Moritz from Sequoia led the investment, he’s on the board, and he had led the Webvan investment back in the day.

Ben:                 Whoa. I didn’t know that.

David:              Yup. So Instacart is sitting here today, having raised all this money at a $3.3 billion valuation on their latest round. One of their investors, their biggest grocery store partner and that they have an exclusive relationship with and as part of that, the company invested in Instacart, is Whole Foods. So everybody woke up this morning and the whole world changed in this space.

Ben:                 Yeah. I mean, it’s heavily, heavily promoted in the stores of Whole Foods. I think if you buy a certain amount, then you just get it at store cost instead of – I think this is right – instead of paying the Instacart markup for it. It’s like much more heavily integrated than any other grocery stores. And, you know, as we’ll sort of get to, Whole Foods is a super premium brand.

David:              Yup. Just speaking from personal experience, having used Amazon Fresh and Instacart and many of the other delivery services, we would use Instacart often just solely for Whole Foods to get the premium products from Whole Foods. That was the most compelling aspect of it for us.

Ben:                 I love Instacart. I’ve been a user for a really long time and since it launched in Seattle, it’s awesome but, you know, you sort of have to wonder at this point they knew Amazon was going to be their competitor at the very outset. And today the news comes out. If you would have asked me a week ago how does Instacart compete against Amazon or the impending Amazon, then I would have said probably that the Whole Foods partnership was their greatest leverage point. I'm super curious now like do these partnerships, much like music streaming, like if Spotify were to get acquired then all of their rights negotiation that they did with the record labels would need to be renegotiated. Those all dissolve upon a liquidity event. I’m curious if the same sort of thing happens here or if Instacart can hold Whole Foods to their, you know, the contractual agreements that they agreed to.

David:              Yeah. I don’t think we know yet. The early indications seem to be that the deal that Instacart and Whole Foods had, I believe it’s looking like was it a four-year deal that they were one or two years into, and that it does have to be honored. But again, these are private agreements. We don’t know. So it will be very, very interesting to see. And even if it does have to be honored, you can bet that as soon as that deal expires, Amazon is not going to renew it.

Ben:                 Right. Yeah. Tenuous position to be in. I’d be very curious to sit down with some Instacart folks and try and figure out what they think the moat is right now and what do you do from here. Because maybe the move is not to double down and strive for world domination but to try and figure out how to play in Amazon’s world. I don’t know.

David:              Well, it’s interesting. I mean, we’re getting into analysis now but I think we have to give all the players involved in this situation. But Apoorva has argued quite compellingly, I think, certainly with investors that he knows that Amazon is going to be his main competitor. But the way you have to compete with Amazon is to compete on a different dimension and do things they can’t do, and his argument is that, has always been, that by just being the thin delivery layer and being able to partner with any grocery store or other retailer for delivery and then all of those other folks are scared of Amazon too and sort of need Instacart as a partner, that they’ll be able to provide a better experience because Amazon itself will have a limited selection, only what they carry.

Ben:                 Oh, please. Please, David. Come on. Amazon starts –

David:              I’m just telling you the argument.

Ben:                 Let me give you a playbook. Amazon, they sell books on the internet and they’re the retailer of these books and you buy from them.

David:              And they would never turn themselves into a marketplace, would they? I mean, they’re a retailer.

Ben:                 Right. Gosh. How could you ever imagine third party grocery store sellers coming on to Amazon’s distribution and customer platform.

David:              I could never imagine that.

Ben:                 Yeah.

David:              Well, then there’s also the fact that groceries, it’s a very different business than books or any other type of retail.

Ben:                 True. Very true.

David:              If you look at what is differentiation in grocery stores, this is actually probably a big reason why Whole Foods was struggling in recent years. You need a lot in a grocery store, but you need a set number of stuff and if you have the stuff that people want which is the same, you know, you go to a Safeway around the country or you go to a Publix in the south or Kroger’s elsewhere, like they’re the same. They’re the same stuff. So as long as you have that stuff and you have the high end natural stuff that Whole Foods has, which again is differentiation. The only reason at least me and Jenny use Instacart. You know, if you have that stuff, do you need anything else? Is selection that important anymore?

Ben:                 Right. Seems like selection and like all the random stuff on Amazon from a retail perspective is much more a long tail distributed than it is in a grocery store. In a grocery store it seems more concentrated toward the head of the curve.

David:              Yeah. Which, granted, there’s a lot of skews but it’s a pretty standard set.

Ben:                 Yup. I spent some time talking to people today and looking around for opinions, And before we get to acquisition category, I just want to talk about a few things to come out of the story. So one of them is that just yesterday, John Mackey was talking about how there’s an activist investor called Jana Partners which holds 8% of his then $11 billion grocery chain and he says, “We need to get better and we’re doing that. But these guys just want to sell us because they think they can make 40% or 50% in a short period of time. They’re greedy – and I’m not going to say this because we have a clean reputation – but, you know, they’re greedy guys and they’re putting a bunch of propaganda out there trying to destroy my reputation, the reputation of Whole Foods because it’s in their own self-interest to do so.”

David:              Wow. That was yesterday?

Ben:                 That was yesterday.

David:              Wow! I mean, you can’t argue that John didn’t know that this was going to happen.

Ben:                 Like the deal was done. Yeah. There’s no way that like, “Oh! Actually, we did do the deal.”

David:              So how does he really feel?

Ben:                 Well, right. And it’s fascinating because what he doesn’t really say there, the good news is he can still be an effective CEO inside of Amazon because he doesn’t throw Amazon out of the bus. But definitely wanted to continue being an independent entity there. And these guys did get a huge pop, Jana Partners, since the time they bought.

David:              Yeah. That, they did.

Ben:                 Let’s spend a little bit of time and cover some basically hot takes on what this could represent and then once we kind of cover all that, then I think acquisition category will start to come together and make sense. But right now, I would imagine they’re not going to immediately transform these Whole Foods into Amazon Go’s. But like, holy crap, what if they know internally that Amazon Go is like such a fantastic experience and rather than slow rolling it out and allowing competitors to start coming in and then potentially Whole Foods to go up in value as they start doing similar things or go up in value for Amazon as people start seeing the obvious synergies, what if it’s just like “Ugh, we should own this now so that we can go big fast with this Amazon Go concept.”

David:              Yeah. Which is on the one hand and Go has been delayed, the public launch supposedly because of trouble getting it to work in public effacingly. But at this point, I think the point that I was trying to make, that we were trying to make in telling the full story and all these other companies – Webvan, Kiva, Instacart – Amazon didn’t just wake up yesterday or today and decided to do that. They’ve been thinking about this category for over 10 years at this point. So if they’re going to do this, you can be sure they have a very clear plan.

Ben:                 Yup. Okay, so they’re really the only ones who can do this. There’s a $400 million breakup fee. So if Instacart gets another bid or pulls out in some way –

David:              Or Whole Foods, you mean.

Ben:                 I’m sorry, Whole Foods.

David:              To be clear, Instacart is not being acquired right now.

Ben:                 Yes. Let’s be clear about that.

David:              We’ll talk about that later.

Ben:                 Right. It’s a $400 million breakup fee. So you start thinking like who even else could bid on them and the thing is, like nobody in the grocery world has $14 billion in cash. In fact in the physical retail world that all, like Walmart has $6.5 million of cash. So unless Apple or Google steps in. Like Kroger only has $400 million. Dan Primack was raising this point on Twitter. Amazon is really the only one who could win this deal. So that's sort of an interesting thing to consider.

David:              Yup, totally. Nobody in the grocery world would have the capital to do this.

Ben:                 No. Another good one. GeekWire was reporting that... a really interesting thing here is that it’s really a training ground for AI retail research. Amazon has all this incredible machine learning artificial intelligence PhD’s and Whole Foods has probably zero. Maybe some small amount of data science. But you start to marry the amount of data coming in from Whole Foods and having Amazon have the ability to deploy that all over their ecosystem not only to make Whole Foods better but to use that in other parts of the business, it sure seems to contribute to the flywheel.

David:              Yup, absolutely.

Ben:                 Another good one. I was reading Freight Waves, a friend who’s in the trucking industry working in a startup there and sent this over. They were talking about how the thing that’s really interesting about this deal is it could dramatically reduce their transportation costs because they’re using Whole Foods in the back as like urban warehouses for things that they want to start putting around to unlock. Imagine Amazon Prime now launching everywhere there’s a Whole Foods because they can keep things in Whole Foods in a non-customer facing way or maybe they can actually just deliver things directly out of the Whole Foods retail area. It really opens up the potential of reduced freight cost because you just have so many more nodes on the network.

David:              Yup, absolutely.

Ben:                 So then another thing I was thinking about is, Whole Foods has, let’s see, 456 stores in the US and Canada. Now, that's zero international. So, Amazon has a global footprint. Will we see them start to make international grocery moves?

David:              Well, Fresh is already in London and Berlin and Tokyo.

Ben:                 Right, right.

David:              So you got to imagine, yes.

Ben:                 Will they need M&A? Like whatever they’re doing with Whole Foods, will it make sense to buy a big international chain as well?

David:              Which as we talked about, is how Whole Foods grew through acquisition.

Ben:                 Yup, absolutely. Then lastly, this one might be a little bit more out there, but who knows? Amazon has reportedly been working on some prescription and pharmacy efforts. CNBC reported that if Amazon wants to sell prescription drugs, Whole Foods could provide the real estate on top of not just prescription drugs but incredibly high value real estate with high net worth clientele all over the place. So it’s a premium customer set at premium real estate and they can do all sorts of things with that including launch a pharmacy.

David:              I feel like we should call this a new section on the show, call it just like pure speculation.

Ben:                 Yeah. Ben and David wildly speculate including a whole bunch of things they read on the internet.

David:              Yeah. If it's on the internet, it must be true. That's the mantra of Acquired.

Ben:                 It is. Yup.

David:              So all right, with that, should we come back to acquisition category here?

Ben:                 Let’s do it. Yeah. What do you think?

David:              Well, I think I have to say two here, and the two are business line with the caveat that Amazon already had this business line. This is just a massive accelerant and reshaping of that business line. And then the other one is asset, you know, as you were alluding to in the wild speculation section of the show. You know, this is now instantly 450+ new in last mile distribution centers in cities that are extremely proximate to the majority of Amazon’s customer base which is middle to high income people, mostly younger demographics that live in cities. So this is an incredible real estate asset that they just acquired.

Ben:                 David, it is like you are literally reading out of my textbook. I have those two boldened. New listeners of the show, we have people, technology, product, business line, asset, or other. And those are my two as well.

David:              Yeah. And which is, I mean, I don’t think either of those is, you know, even in the couple of hours since the acquisition, I don’t think there’s any great depth of insight in either of those.

Ben:                 No.

David:              But well, I’m looking forward to talking about tech themes. But before we do that, should we opt to “what would have happened otherwise”? And we should talk about Whole Foods and Amazon but in particular, I want to talk here about what’s the future for Instacart.

Ben:                 Okay, wait, pausing on Instacart real quick. What would have happened otherwise? So, you know, when we’re thinking about what we were talking about earlier with Amazon, a marketplace and they have fulfillment by Amazon for customers who are on merchants who are on the marketplace, it’s interesting to think about, first, they had to be their own retailer and then they could open up the marketplace. You know, in this case it seems to me like first, they’re going to be their own sort of grocer which let’s not forget, I don’t think we’ve said this on the show yet, grocery is an $800 billion market. Like grocery is the THE market. And it’s like a massive –

David:              If you look at all of retail, not just e-commerce but all of US retail, grocery is about 15% of that, so it’s enormous. Enormous. I mean, it is as big as Amazon’s entire business. It is as big as all – bigger than all of e-commerce combined right now.

Ben:                 Well, I mean, it’s basic human stuff, right? Like look at Maslow’s hierarchy. We need food, we need shelter. And actually, if you look at household spend in order, it’s taxes, house, car, food.

David:              If you’re looking purely at retail, the first two of those don’t apply -- house and taxes, and it’s car and food. Right? And like think about Uber and Lyft. Well, okay, I’m going to pause here. I’m going to save this for tech themes. Continue.

Ben:                 Yeah, yeah. Okay, so massive unbelievable ridiculous market. People need to eat. And it’s interesting that to me, Amazon is going the direct route with being the place where you buy the food, when they buy owning Whole Foods and not opening it up as a marketplace. Like one direction they could have gone is to go to every physical grocery store at scale and say you can reach customers online using our platform the way that Instacart did. And it’s interesting that they sort of went the other direction with it and really bought their way into possibly unfolding it in the same way that they unfolded from their normal retail business.

David:              The rest of retail, yeah, absolutely.

Ben:                 I don’t know. Like if they didn’t buy Whole Foods, will they have bought a different grocery store? If you look at Albertsons bought Safeway for $9 billion a couple of years ago and so that, I suppose Albertsons could have bought Whole Foods. I know they were considering it. Amazon maybe could have bought Albertsons. At the end of the day, I think Whole Foods was the best one to buy because it is the best selection and the most premium customer segment and the most premium real estate.

David:              And it actually had to the extent any large chain did, it actually had differentiation. I mean, I don’t think it was lost on Amazon that, you know, I seriously doubt Jenny and I were the only folks that used Instacart to get Whole Foods. And I really doubt that that was lost on Amazon.

Ben:                 Yeah. I think you’re right. So to me, Amazon gets a heck of a lot more leverage out of buying Whole Foods than Albertsons would get out of buying Whole Foods. And so from a value creation perspective, I guess it creates more value for the world for Amazon to own the asset.

David:              So let’s talk quickly about Instacart. I mean, what do we think is the future for them here? I mean, they have a very large valuation. The product is great. I completely agree with you, Ben. I mean, we love it. But we love Whole Foods, right? This is big for them. What’s the path forward? I have some thoughts but, well, I’ll go first.

Ben:                 Okay.

David:              So on the surface, I mean, this is a bad day. This is a very, very bad day for Instacart. On the other hand though, you know, I don’t think all is lost for them by any means. They have I think the only model that makes sense too that is capable of scaling quickly in anything less than a decade-long time frame in this space which is let the stores and the companies that are good at logistics do logistics and will do the last mile.

Ben:                 Right. Zero inventory risk.

David:              Zero inventory risk. I mean, when we talked about the Webvan boat flipping upside down, it was that they had plowed so much money into inventory and their fulfillment centers. Then when they were losing money on every order and a tidal wave of demand came in, they didn’t fail because people didn’t want the product. It failed because the capital demand has gotten too great on the business. That’s how they lost all of the $800 million they raised. Instacart doesn’t have that problem. More demand is more gross market for them. So that’s good. And I think with this acquisition, what this is certainly going to do in the medium term is it is going to drive everybody in the grocery, pharmacy, any local retail space. If they weren’t afraid of Amazon already, they’re going to be driven into the arms of Instacart. I think probably starting with Trader Joe’s, like if Instacart can land Trader Joe’s, to my mind they’re sort of the last bastion of differentiation in this space, and they’re sure as heck not going anywhere near Amazon after the Whole Foods acquisition. So I don’t think all is lost.

Then the other thing for Instacart is of course the other player in the commerce space which is Walmart which has been very inquisitive. Acquired Jet, just also acquired Bonobos today in a story that was vastly overshadowed by Whole Foods; that acquired ModCloth, plenty of others. They are going to be very interested in this space too.

Ben:                 And Walmart’s in food. I mean, they have the superstores. They’re effectively just huge grocery stores attached to Walmart.

David:              Yeah. Now the problem is, Ben, as you mentioned, Walmart only has $6.5 billion of cash on their balance sheet, and Instacart is sitting in a $3.3 billion valuation. So, you know, Walmart is not going to spend all their cash on this deal if they buy Instacart, so returns are limited there.

Ben:                 Yeah. Ooh, that's interesting. If you’re Apoorva, do you take Walmart stock?

David:              Yeah. Well, you better think hard about that. I believe Jet was all cash, right?

Ben:                 I don’t actually remember.

David:              I think it was.

Ben:                 With heavy, heavy earnouts.

David:              Heavy earnouts, right, but all cash. So Marc Lore didn’t have to make that bet.

Ben:                 Yup. Hey, I mean, look, you can go head to head with Amazon. Like Instacart might actually just deliver like a way better consumer experience. I mean, maybe, I don’t know –

David:              Keep going. It’s a dangerous thread of logic that you go down when you start thinking that way, but go...

Ben:                 Right, right. Well, I’ll pivot a little bit because I hit it when you did too.

David:              What I hit on is price, right? Like the thing is, Instacart is more expensive than going to the grocery store. And if Amazon, now only Whole Foods can make it cheaper, you just can’t compete. Right? And this is how Amazon won retail.

Ben:                 Right. And maybe there’s a play for Instacart to aggregate the longtail of all the sort of independent grocery stores and smaller grocery stores and everything that is not Whole Foods. But you have to imagine at some point Amazon will open up a marketplace for this.

David:              Yup.

Ben:                 But the thing is, so with grocery delivery, Amazon Fresh is much more on like the sort of... I’ve actually never done it but I think on the sort of weekly cadence or bi-weekly cadence, right? Whereas Instacart is much more on demand.

David:              Yeah, I think that’s right. You can do on-demand from Amazon too, I believe. But they try and follow you to a weekly cadence.

Ben:                 Yeah. And so this thing for Instacart, the ability to aggregate third-party sellers on a platform in an aggregated way where I can go to Amazon and order from three different third-party sellers and since they’re all fulfillment by Amazon, it sort of gets to my house at the same time, it’s all through the same system. Since Instacart uses an on-demand system, you really can’t actually order from multiple grocery stores because the logistics of that, sending the shopper in the next 2 hours to both grocery stores is prohibitively expensive and time consuming. So you know, there actually isn’t really a play to aggregate the longtail to go to multiple stores but maybe there is a play to aggregate the longtail where in every local market you have all the smaller stores on there that Amazon doesn’t have with Whole Foods. I don’t know.

David:              Yup. But you’re competing with the Everything Store. And aggregation theory, as we’ve talked about. So we’ll see. I certainly don’t think, you know, starting Monday or today that Instacart is doomed. And actually, I do think there certainly are plenty of ramifications from this deal that are positives for them. But it just does speak to, you know, in the world we live in right now, Amazon is the new Microsoft from the 1990s.

Ben:                 Yeah! Dude, okay, I'm glad you’re going there because that’s my first tech theme.

David:              Take it away.

Ben:                 And I think probably one of yours too. In one sense, they’re the new Microsoft. In another sense, the big five right now – Facebook, Amazon, Microsoft, Google, Facebook – are way more powerful. Just way more powerful because of machine learning and because of the data assets that they have than Microsoft of that era. Because I really do think that there is this like, “Well, we can out execute this company right now because they don’t know how to do consumer, they don’t know how to...” With these companies, it’s just a matter of time. I really thought like, “Wow.” Amazon Fresh isn’t as good as an experience for a long time as Instacart. But like at some point, Amazon just has so much cash and these companies have so much cash. They just go in and they buy this huge asset and they get this incredible data asset out of it and they learn how to optimize every single experience for every single customer based on exactly their wants and needs. And I think that also with the availability of cloud computing, like you start your two-pizza team inside Amazon and it’s small and you work on a thing and then suddenly if it’s working and you find product for market fit, you get the power of Amazon’s cloud behind it. I really do think that the big companies now have ability to enter markets that they just compete with everyone and they’re fierce.

David:              I think it highlights the importance of you’re going to do the crazy thing and attack one of these guys head on – well, you can’t attack head on but attack them on their turf, the angle you enter at has to be completely orthogonal to the angle that they’re approaching the market. And I think Instacart, you listen to Apoorva and again, he’s very articulate and makes a good case for why Instacart can do things and offer things that Amazon couldn’t and probably still can’t. But I don’t know that the angle, like it was a little too acute, you know, as we’ve been talking about. It’s not so totally different that enables a completely different customer experience. And I think you’re right. The power that the big 5 – big 4 or big 5, however you want to categorize it – have right now are make the power that Microsoft had in the ‘90s look quaint.

Ben:                 I agree. And to pile on that one more time, the market really doesn’t believe that anyone can compete with Amazon once Amazon decides to enter a market. Amazon is by far the scariest of those five horsemen right now because here’s how the market responded today when this deal happened. Target is down 9%, Walmart is down 5%, Costco 6%, Sprouts 11%, and Kroger 13%.

David:              Wow!

Ben:                 Amazon’s signal they’re going to enter a market and just –

David:              Like this should not be news to anyone. Amazon has signaled for 10 years that they’re coming for groceries.

Ben:                 David, the irrationality of the market will never cease to be a topic on this show.

David:              Yeah. But actually, that is a good point that I think is worth a moment that as scary as Amazon is, they can’t start from zero and destroy you. Really, I don’t think this would have happened without the 10 years of, you know, from Webvan to Kiva to Fresh and to observing Instacart. Everybody knew this was coming. So I don’t think like if you’re Airbnb and you have another amazing marketplace but you’re nowhere near Amazon, like I don’t think Amazon can launch “Amazon Stays” tomorrow.

Ben:                 Right.

David:              So there is some solace there. There’s plenty of –

Ben:                 Especially in those marketplaces, right, of building up a big supply and a big demand.

David:              Yup, absolutely they do not happen overnight regardless of who you are. But I think it also highlights something else that if I were... I don’t happen to believe necessarily the bare case on Amazon right now. But nobody seems to be making it so I’ll take a stab. Like here’s my bare case on Amazon. As they grow and everything you were just saying and enter so many new markets, there is going to be this incredible, incredible human capital management problem there. I think Jeff Bezos is amazing. He’s one of the best management leaders ever to be able to grow Amazon as it is in such a decentralized fashion. But at some point, even in as an efficient an organization as Amazon, there’s communication costs within the organization, are going to get higher and higher. So there is probably a natural human limit to how much they can scale in terms of businesses.

Ben:                 Yeah. I mean, that's always been the case against big companies and the case against conglomerates for a long time. Question is, has Amazon really found the formula to make that to persevere through it?

David:              Well, I think they’ve done better than just about anything in their history.

Ben:                 Right. But what is the upper limit of their current model?

David:              Right. And, you know, you can certainly argue that in today’s world and in tech we’ve talked about this. I think we’re in tech themes now on the show about technology is a lever.

Ben:                 Very much so.

David:              And like the two-pizza teams in Amazon, like a two-pizza team started Prime now and it was on Go and it was on Fresh and all these things.

Ben:                 One thing that we shouldn’t lose though, like finding these two-pizza teams, the Amazon Go team with one location that is only open internally to Amazon employees is like a thousand people.

David:              And those are a thousand people with individual personalities and politics and wants and needs and desires. So, again, I'm not sure. I don’t want to compete head-on against Amazon. But if you were to articulate a bare case, to me, that's the best one right now.

Ben:                 Another interesting... it’s not as much a tech theme but an Amazon theme, is Amazon’s never done an acquisition on this order of magnitude before. Their M&A strategy sort of changed from buying sort of properties that they can integrate into their systems – Audible and Zappos and things like that – to buying technologies that were even cheaper and then they sort of stay on this like buying lesser expensive technologies for a while or maybe more expensive in this sort of Kiva or elemental technology, so things like that. But really, like they haven’t been acquiring the sort of I guess in the media world to be like properties or like retailers. So it's really interesting to come out swinging so hard. Like they’re really putting a stake in the ground that this is a huge business for us. And there’s this great chart on Axios and I’ll just read it from the bottom up of deals above $500 million. So you have Quidsi in 2010, Kiva in 2012, Zappos in 2009; and those were like 500, 700, 900 million. Twitch for 970 million in ’14. Then you have Whole Foods at $13.7 billion and the next step down from Whole Foods that’s kind of between Twitch and Whole Foods is an office building that they bought in 2012 from Vulcan for $1.16 billion.

David:              So literally, Salt Lake Union is the next acquisition.

Ben:                 Yes. They bought an office building, yeah, for one order of magnitude less than this deal and that was the next point to that.

David:              But still bigger than Twitch.

Ben:                 Yeah.

David:              Well, anything else you wanted to say on that?

Ben:                 No, that's it.

David:              Okay. Perfect lead-in to the tech theme that I really want to talk about here which is the power of big markets and the connection that I was making is that, you know, the real estate market is enormous. If you’re going to pay more for an office building, then you would for Twitch. But, you know, taking a step back here. I think a lot of people and certainly the press and the public can look at this whole situation that we have discussed and all these companies then say “Man! Silicon Valley is crazy. Venture capitalists are nuts. These people are so stupid. How could you put so much money into Webvan, into...” who knows, hopefully Instacart has a bright future ahead but maybe that goes to zero too. Like maybe Amazon just killed it. Like how could you do that, how could you be so irresponsible. I think the answer is that when you’re talking about a market as large as grocery, I mean, literally a trillion dollar market, you know, 15% of US retail, you have to think about it in terms of like, “What if I'm right?” And this is how Amazon and Jeff Bezos thinks about things. It’s like the power of attacking a large market, it's going to be very hard by necessity because there’s going to be a ton of competition. And your odds of success are certainly not 100%. But if you get it right, I mean if Amazon gets this right, that it’s literally going to double the size of Amazon and think about how big Amazon is already.

Ben:                 And people thought AWS was a big business, you know.

David:              Yeah. And these are the kind of bets that lead to – I use the word “bet.” I don’t like the word “bet” because it’s not a bet. It’s about the hard work that you do over a decade-long period that Amazon has done to get here and they have another decade ahead to continue to realize it. But if you can be successful, that's how you build Amazon scale businesses.

Ben:                 Yeah, I love that. And in venture it’s not about all the ones you lose, it’s only about the ones you win.

David:              Right. I mean, you know, close to a billion dollars lost on Webvan. But already, if you take those learnings and you had bought Amazon shares or even Instacart shares, like you would be getting a nice return on that.

Ben:                 Yup. Want to grade it?

David:              One other one I wanted to do real quick. I don’t know that there’s too much more insight to add but I don’t think we’ve talked about it yet and we can’t have an episode on Amazon without talking about the flywheel. Because I mean, really, that is the other – besides making big bets, that is the other core element to Bezos and Amazon’s philosophy. And if you think here about kind of especially Alexa and Echoes and were do Echoes live, like they live in the kitchen, and how that business has grown within Amazon. And then attaching a grocery business to that and “Alexa, bring me some milk,” you know, you ca start to see the flywheel spinning and that's how you can create this just unsurmountable competitive advantage in this space.

Ben:                 Absolutely.

David:              All right. Should we go back to wild speculation and grade this thing?

Ben:                 Yeah. I mean, I don’t know, like it’s...

David:              Okay, so they’ve spent, what was it, $13.7 billion. And I mean, what’s the return they get?

Ben:                 Yeah. So here’s an interesting... what else could they have done with that, that could have possibly... Let’s see if we can do like an expected value calculation. So you pour that into something else and we can think of that what something else could be and then I guess like trying to figure out the coefficient of possible success –

David:              – and everything in America.

Ben:                 Right, right. Like there aren’t that many more bigger markets than this. And especially that Amazon is already playing in.

David:              Well, there’s one. There’s transportation. There’s three. There’s government and taxes. There’s US real estate and there’s transportation. Those are the only markets that are bigger than this.

Ben:                 Wow! It's funny Amazon doesn’t, I mean, other than the buildings they own, they don’t really play in real estate. They so far aren’t really playing in transportation other than logistics, like certainly no consumer transportation. Do we want to make any calls on this show? I know this isn’t grading it, but we should make a long bet or something that in 5 years, are they competing with Uber, Lyft, or –

David:              Airbnb in real estate.

Ben:                 Yeah. There is so much that Amazon is not competing in yet.

David:              Yeah. I mean, well, what you’re talking about is no longer a big 5 in tech, but a big 1. I don’t know. I have a hard time seeing that happen.

Ben:                 Well, you know, if we’re grading this acquisition and we’re being that speculative, I just didn’t think it was that much further.

David:              Yeah. Well, I mean, I think right now I'm going to give it an A-, which is in line... This feels weird to say given the difference in magnitude between the two of them, but I'm thinking about our last episode on SoundJam and in some ways, this feels like a SoundJam to me. Like, Amazon was going to do this anyway. Clearly, they’ve been doing it for a decade. This is an acceleration to their plans and hopefully for them it works out like SoundJam worked out for Apple. But I can’t give it more than an A- even if it does work out beautifully because I don’t think it’s a fundamental transformation. This isn’t like an Instagram that's going to come in and just completely take the whole organization in a direction that it wasn’t going. It wasn’t really going this way.

Ben:                 Right. Yeah. The only caveat on that is it could actually be their biggest business in 5 years.

David:              Yup. But for me, if our A is a NeXT or an Instagram, a business and a team that just completely transforms a company, like this is not transformative.

Ben:                 No. That's a great point. And well, it certainly won’t... yeah.

David:              And honestly, if it fails, like “Well, that was a lot of money to spend on this.”

Ben:                 Right. It’s really just the opportunity cost with that capital.

David:              Yeah. So assuming if they succeed, I’d give it an A-, maximum grade.

Ben:                 Maximum grade, really?

David:              Yeah. There we go. Maximum grade.

Ben:                 Really? I mean, what if they start commanding $600 of the $800 billion in this market?

David:              I think they could do that anyway. They didn’t need to buy Whole Foods to do that.

Ben:                 Okay. All right. A- sounds good to me.

David:              All right. There we go. Follow-ups and hot takes.

Ben:                 Follow-ups and hot takes.

David:              Well, we mentioned Walmart buying Bonobos.

Ben:                 Which I don’t, you know, whatever. Like, great, Jet is going to –

David:              Doesn’t seem like a Target customer fit to me.

Ben:                 No, but I think what the deal is, is I think that that Walmart through Jet is really just trying to buy a bunch of these sort of smaller e-commerce companies that people love and figure out, you know, can they just own a portfolio of these things. Maybe not sell them in Walmart or something like that but, you know, if the goal was to go around and buy a bunch of these like Casper and Harry’s and sort of internet and now Warby Parker, like those sorts of businesses, like does it make sense for Walmart to own a big portfolio of those? I don’t know but I don’t think this was... like this wasn’t a huge outcome for Bonobos.

David:              No. I mean, given how long the company was around and how much money there is. But, you know, nice exit.

Ben:                 Honestly, what it feels like and I think this is a Ben Thompson tweet earlier, but like, this being announced on the same day, it’s just like the contrast, it really showed how stark the contrast is where like Walmart is kind of playing checkers and Amazon’s kind of playing chess.

David:              Oh yeah. I love it. Oh wait, throw in one more tech theme that actually I’ve been thinking about a lot lately and I think is a very powerful one – is that Amazon is playing offense, Walmart is playing defense. You don’t win by playing defense.

Ben:                 And they’re playing prevent defense.

David:              And especially as a startup. Not that Walmart is the opposite of a startup but, like, when you’re a startup you have nothing to defend. You can only play offense. That's the only way to win.

Ben:                 Are you insinuating that Amazon may be playing like a “Day One” company?

David:              I hadn’t thought of that. Man, so insightful.

Ben:                 I know. All right, carve outs?

David:              Carve outs. Let’s do it.

Ben:                 So mine is... a friend of the show, Brian McCullough from the Internet History Podcast – which if you’re listening to this show, you would love that show – tweeted this link out the other day and I had to just go watch the whole thing because it was one of these things you can’t take your eyes away from. It is Mark Zuckerberg in 2005 coming back to Harvard to give a guest lecture in CS50.

David:              Oh man, I saw that. I haven’t watched it yet. I need to.

Ben:                 It is unreal. First of all, it’s super insightful from a technology perspective to understand how Faceboook succeeded in a way that a lot of their other precursors of social network and sites failed. So it’s interesting to learn about Facebook’s early architecture from a tech perspective. But then on top of that, it is just so stark to see Mark Zuckerberg speaking the way that he spoke in 2005 juxtaposed against the way that we all hear him today. And Mark without PR training, and Mark without a team of writers, and Mark without a perfect diet and hitting the gym all the time. He’s just insanely off the cuff and almost a little like bro-y like there’s a little streak of that in there.

David:              Well, two things. One, Wirehog.

Ben:                 Yeah!

David:              Facebook was just a way for him to launch like a Napster competitor. And then two, the Sequoia pajama pitch.

Ben:                 Oh my god, yeah.

David:              He was total bro.

Ben:                 Yup. And in this pitch, he probably... or in this lecture, he’s like, “We have two hours. I’ll probably talk for 15 minutes because I don’t know what you guys want me to talk about.” And then probably 15 or 20 times –

David:              It's so nice to know people can’t grow up.

Ben:                 I know, right? Over the course of 2 hours, he says like, “Yeah, I don’t know if this is interesting to you guys at all. I don’t know if this is relevant. I don’t know what you want me to say. I don’t know if this is relevant.” He just keeps saying that over and over and over again. You’re like, “Wow!” It’s so different.

David:              Now look at him today.

Ben:                 Yup.

David:              What matters is potential, not the current state of things.

Ben:                 Potential and network effects.

David:              Yeah. And flywheels. And big markets. And playing offense, not defense. All of the things. All right, my podcast is the episode this week of Exponent – Ben Thompson and James Allworth’s great podcast that I'm sure many of you guys listen to and should if you don’t already – on podcasts. We’ve talked about this on the show. We did the episode a while back on Midroll and Stitcher. But it really feels like with Apple announcing that they’re going to bring a whole bunch of changes and improvements to the platform of podcasting, like now might be the time. I mean, we’ve argued on this show where podcasting is obviously near and dear to our hearts and we are in the startup and venture world, but that it’s just too soon. The market is too small. You can’t build big businesses here. But I wonder if now is the time that things are changing.

Ben:                 It’s a great time to be in podcasting, David.

David:              It is. Which is also why it’s a great time to tell your friends about Acquired. Oh, couldn’t help myself.

Ben:                 No, that's great. It leads exactly into our show close. So listeners, happy Friday night. I’m sure you probably will listen to this at another time. But David, enjoy your weekend.

David:              You too, Ben.

Ben:                 Listeners, if you haven’t subscribed and you want to hear more, you can subscribe from your favorite podcast client and if you feel so inclined, we would love, love, love a review on Apple Podcasts. So with that, go shop at Whole Foods.

David:              Go shop at Whole Foods. To more wild speculation in the future.

Ben:                 Yes.

David:              All right. Thanks, everyone.

Ben:                 Thank you.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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