“Every so often an event occurs that shakes the industry to its core. Amazon’s acquisition of Whole Foods is one of those.” So said one US retail analyst today after the e-commerce giant announced a deal to buy the natural and organic grocer for US$13.7bn. The transaction stunned the sector, with analysts hailing it a game-changer. Amazon faces short-term challenges with Whole Foods but the acquisition looks set to give its ambitions in grocery – a sector it entered ten years ago – a boost and rival retailers and manufacturers will be sitting up and taking notice. Dean Best reports.
You will know just-food’s beat focuses reporting the strategic developments at the world’s leading packaged food makers – but every now and then a story comes along elsewhere in the supply chain of such importance to the boardrooms of the sector’s major manufacturers it would be remiss of us not to cover it.
One such story has hit the headlines today with news Amazon has struck a deal to buy upscale US grocer Whole Foods Market.
Ask any food industry executive to list the trends shaking up the sector and digital and e-commerce will be pretty high on the list. Drill down into that further and Amazon, after shaking up other retail sectors with its online scale, has been one of the subjects in the digital sphere of particular interest to food manufacturers.
The core Amazon.com site has become an increasingly important channel for a number of food companies, while the e-retail giant has been dipping its toe into online grocery delivery in a number of markets through its Amazon Fresh service. Amazon also has a series of other grocery-oriented services – from Amazon Pantry to the Amazon Dash replenishment service – and also offers takeaway deliveries from restaurants in selected cities in the US and in London.
However, Amazon’s ambitions in bricks-and-mortar retail have long been the subject of fevered speculation. In December, when the retailer launched Amazon Go, a single 1,800 square feet store in Seattle, it was, with its use of artificial intelligence-powered technology, hailed as a “game-changer” for physical retail.
For all that, the US$13.7bn all-cash transaction announced today marks the first significant move by Amazon – with resources beyond most retailers and shareholders more prepared to take a longer-term view – into bricks-and-mortar retailing. Some will say Amazon’s move appears an acknowledgement from the e-commerce behemoth it needs a physical presence to make grocery retailing work. Nonetheless, the move has shaken investor confidence in the largest grocery retailers in the US, with shares in Wal-Mart and Costco down more than 6% and Kroger’s stock more than 12% lower at the time of writing. In the case of Wal-Mart, the slide in its share price suggests Amazon’s takeover of Whole Foods has overshadowed its own notable announcement today of the acquisition of US online clothing retailer Bonobos.
According to retail consultants GlobalData Retail, Whole Foods’ share of the US grocery retail market stands at 1.21%. Amazon, which since it entered the US grocery sector in 2007 has focused on a pure-play online business, has accrued 0.19%. Grocery retail in the US remains, in comparison to other developed markets, very fragmented. However, Neil Saunders, the managing director at GlobalData Retail, said today’s announcement would “shake the industry to its core”.
“For other grocers, the deal is potentially terrifying,” Saunders said. “Although Amazon has been a looming threat to the grocery industry, the shadow it has cast has been pale and distant. Today that changed: Amazon has moved squarely onto the turf of traditional supermarkets and poses a much more significant threat. The only mitigation is that the more niche appeal of Whole Foods will, at least for the time being, limit the threat to other players.”
The acquisition of Whole Foods, with its 400-plus stores in the US, gives Amazon the ability to ship groceries more efficiently to consumers. “Those stores solve much of Amazon’s ‘last-mile’ delivery challenge for fresh groceries, which is arguably the biggest single reason that Amazon has not been able to make a dent in the grocery shopping of the 60% of [US] millennials who already buy other items from Amazon,” industry analysts The NPD Group wrote today.
Moreover, Amazon, which has also trying to build ranges of own-label food, will also get its hands on Whole Foods’ private-label supply.
Neil Stern, senior partner at US retail consultants McMillanDoolittle, told just-food the takeover of Whole Foods “clearly signals Amazon’s intent to get serious about gaining share in the grocery business”. He said: “This now gives them a four-pronged attack: Whole Foods as a physical point of distribution, Amazon subscription in Pantry to drive centre-of-store, Amazon Prime Now for immediacy [and] Amazon Fresh for full home delivery. I think this instantly makes them a formidable force.”
Could Amazon’s move for Whole Foods spark more M&A in the US grocery retail sector? Could say, Kroger, look to combine with a business like Netherlands-based Ahold Delhaize, with its significant presence in the US?
The announcement has caused analysts to start gaming what Amazon’s next move could be. One analyst, Sanford Bernstein’s senior European food retail analyst, Bruno Monteyne, issued a note comparing Amazon to Chinese peer Alibaba and he set out which grocers could be in the sights of the Amazon and CEO Jeff Bezos – and not just those with operations in the US but in other markets, too.
“The battle for real estate, close to consumers, has started,” Monteyne said. “To ship efficiently groceries to consumers, you need physical distribution – item-picking to put parcels together, click-and-collect points – close to the consumer. Stores are ideally located for that. They won’t look like stores in five years time but they will be in those locations.
“Alibaba didn’t buy one retailer, it has bought already four retailers for the same reasons. The same will be true for Amazon: it will need a lot more physical store estate to distribute efficiently, across the major cities. Who can be bought next? Ahold-Delhaize has similar a profile to Whole Foods. It would also provide Amazon with full dominant coverage of the Netherlands, where they currently lack coverage. Only one third of Ahold-Delhaize cities have overlap with Whole Foods. Two, Carrefour would provide great coverage of Brazil and western Europe. Three, within the UK we think Tesco will aim to be the Amazon-alternative long term, so the two candidates would be Morrisons or Sainsbury’s.”
It is important to look at Amazon’s move to buy Whole Foods in a considered manner. The combined business will account for not even 1.5% of grocery sales in the US. The largest player – Wal-Mart Stores – accounts for little more than 14%.
And it is important to remember the pressure Whole Foods has been under in recent quarters. There is little question Whole Foods has found the going tough in the last couple of years as mainstream US grocers eat into its core natural and organic markets, categories that offer the retailer’s larger, conventional peers ways to boost their own flagging sales. In Whole Foods’ last full financial year, the retailer saw comparable-store sales decline 2.5%. It also reported lower margins year-on-year. In February, when Whole Foods filed its numbers for the first quarter of its current financial year, the retailer booked another period of falling comps; it also issued new, lower sales, margin and earnings targets for the year as a whole. Amazon, it must be noted, has so far struggled to make significant inroads in the US grocery sector.
Moreover, an acquisition of Whole Foods opens up a grocery front for Amazon relatively limited in scope to the more affluent consumers in the US. “Not that shocked by acquisition to boost food/physical presence. Biggest surprise: Amazon further pigeon-holing itself by focusing on affluents,” US retail analyst Natalie Berg tweeted today.
And, for retailers further afield, with Whole Foods having just nine stores outside the US, the short-term impact will be limited.
However, there is no doubt grocery retailing executives – and for that matter those at manufacturers – will no doubt be ruminating over today’s news all weekend. As GlobalData Retail’s Saunders adds: “For Amazon, Whole Foods fulfills, at a stroke, its ambition to be a serious player in the grocery market.”