The Diaper War & Amazon Whole Foods

One of the benefits of running The Councils over the last 15 years – a private leadership network of Internet executives that I founded – is that I get to learn the stories behind the stories.

And the diaper war behind the Amazon Whole Foods deal is case in point.

You won’t see this much in the press – but if you want to understand the Amazon Whole Foods deal, then you need to understand the bare knuckled and messy great diaper war.

More than a decade ago, a team of entrepreneurs in New York City built an ecommerce business selling diapers and soap that scared Amazon. This team of entrepreneurs identified chinks in Bezos’ armor. [If you want the details on this story that are available in the public domain, then read journalist Brad Stone’s definitive biography of Amazon, The Everything Store. He gets it right].

Surprisingly, these entrepreneurs were better at certain aspects of the customer experience, logistics, shipping, and warehouse management than even Amazon. And Bezos knew it.

This company, Quidsi, but known to consumers as diapers.com and soap.com, had low prices, a great web experience, and fast shipping. Consumers loved them. “Moms got hooked on the seemingly magical appearance of diapers…and enthusiastically told friends,” reports Stone. I followed this at the time and can confirm that. diapers.com started appearing unasked in our customer listening labs the way google.com did back in the late 90s.

What did Amazon do?

They approached Quidsi and warned them that they were about to move into diapers themselves and that they should therefore sell their business to Amazon. That’s really how it went down.

The Quidsi founders said no. The wanted to keep building their company independent of Amazon.

How did Bezos and team respond to this rebuff to their not-so-friendly acquisition offer?

Amazon immediately dropped prices by 30% and focused their price bots on diapers.com. The diapers.com team discovered just how much they were in the cross-hairs by changing prices and watching “as Amazon’s website changed its prices accordingly [and immediately].”

At first, diapers.com loyal customers stayed loyal but eventually Amazon’s below-cost prices had an impact and revenue slowed. Consumers could not resist the massive price drops over at Amazon. They left diapers.com en masse. That unfortunately made the Quidsi investors nervous and they stopped providing capital.

Just how much was Amazon willing to invest in this diaper war? $100 million.

When the Quidsi team realized the scope of what they were up against, well that’s when the proverbial poop really hit the fan.

As a startup, they obviously could not afford to lose $100 million. In fact, thanks to Amazon they could no longer raise capital at all. So they sadly realized that Bezos had forced them to sell.

They first approached Walmart preferring to sell to them than to the now-dreaded Amazon. But, Walmart went too slow and made a too-low bid so the founders swallowed their pride and called Amazon.

Amazon made a bid – also too low. But, simultaneously during the deal negotiations announced Amazon Mom, which lowered their diapers prices even more. In fact, they told the diapers.com founders that if they balked at their price and tried to go negotiate with Walmart, then they at Amazon would drop prices even further and do whatever they could to destroy them before they could conclude negotiations with Bentonville.

As a result, the diapers.com founders “stuck with Amazon, largely out of fear.”

This really happened.

After the sale to Amazon, the Quidsi founders stayed on at Amazon and one might imagine them learning about what worked and what was not working in the Bezos empire. Especially in light of what came next.

When their non-competes expired, they met with Bain Capital and sketched out a way to compete again with Amazon – but this time in a more defensible way. Based on that quick chat and the track record of the founders, Bain provided $250 million in startup capital for these ecommerce veterans to start Jet. Years after the diaper war, the losing side had raised a $250 million war chest to go compete with Amazon based essentially on a chat? That may be the largest seed financing round ever. Bezos must not have been a happy camper.

What was it that Shakesepeare said about revenge best served cold?

And just a year after they launched Jet, Walmart swooped in and bought them for $3.3 billion. This time Walmart’s bid was neither too low nor too slow – in fact, it was one of the largest prices ever paid in ecommerce M&A.

But the story continues.

After this sale to Walmart, which happened less than a year ago in August of 2016, the founders of Jet were immediately put in charge of Walmart’s entire ecommerce operation. For the first time, they were in a position to really compete with Amazon. And they moved fast. For example, they quickly figured out ways to effectively combine online and offline assets.

And you can bet that Bezos noticed what was happening. The sleepy Walmart that he had outmaneuvered for decades quickly reported huge growth in online revenues and observers like me could see a renewed vigor in everything they were doing.

One interesting seemingly small item – but one that must have scared Bezos – is that the new Jet-led leadership at walmart.com was not only offering in-store pickup but shoppers were given dynamic discounts to choose that option. So you could go buy a box of diapers at Walmart.com and the website showed you in real-time what it would cost if you had it delivered vs. the lower price you’d pay online if you arranged to pick it up at your local store. The diapers.com founders were again using their smarts in logistics to change the customer experience.

Amazon could not offer such features because they had no stores to speak of – except for a few trial experiments.

Enter Whole Foods.

And that is why diaper war is behind this surprising and surprisingly fast Amazon acquisition of Whole Foods. Had Amazon not gone to war against Quidsi and had the Quidsi founders not decided to raise $250 million to compete against Amazon and had Walmart then not bought Jet, then Amazon might not have bought Whole Foods.

With the acquisition of Whole Foods, Amazon gets 460 stories in affluent neighborhoods that they can use to compete with the Jet-infused Walmart.

Will this Whole Foods deal work well for Amazon?

I don’t know but we now have two retail giants with smart ecommerce teams and offline assets battling each other. And now it looks like the diaper war may become something more resembling a world war.

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Phil Terry is Founder and CEO of Collaborative Gain, author of Customers Included, and a widely respected speaker and experience designer. He designs experiences for customers, for leaders, and for the art world (through his Slow Art Day initiative). He was also on the startup team of one of the first companies bought by Amazon back in the 1990s. If you want to invite Phil to speak, get in touch.