Feb 12, 2019 | By Sandra Halliday
Big data meets consumer insights. Experience WGSN.
You’ve surely heard by now that Amazon has bought Whole Foods for $13.7bn. But given that it happened late on Friday you may not yet have (quite) felt the shockwaves that have reverberated through retail, not just grocery, as a result.
One analyst called it “really exciting” for shoppers but “really scary” for the retail sector.
Other analysts said we could expect to see Amazon using its data and distribution strength to boost Whole Foods but also to use its new stores portfolio as distribution hubs, nicely embedded in city centre locations, for other parts of its business. They also expect the firm to build up Whole Foods’ operation in other areas such as pharmacy and personal care. And we could see the self-scan/instant pay technology that’s being trialled via the Amazon Go app being used in Whole Foods stores (although it seems fully automated stores aren’t on the agenda for now).
There is also intense speculation about Whole Foods’ pricing. The chain succeeded for quite a few years by attracting affluent shoppers who didn’t seem to mind its high prices. But as organic grocery competition has increased and Whole Foods has lost its ‘first mover’ advantage, the affluent have shown they can be as bargain-conscious as everyone else. Some analysts think this will mean an across-the-board lowering of prices in Whole Foods stores.
But even without such a development, it means more aggressive competition and price pressures in an industry where margins are wafer thin and that is already reeling from the expansion of low-cost chains such as Lidl and Aldi.
Of course, the reverberations of this deal spread beyond the grocery sector. A good example was banking. Banks with branches inside big US grocery chains were concerned and fretted over whether any accelerated closure of grocery branches might see them having to find new homes for their face-to-face businesses after a period in which they’ve been closing standalone branches. And there was the even greater fear that Amazon could move into banking just as other retail chains have done.
The facts as they stand are that e-tail giant/disruptor Amazon is paying $13.7bn to buy high-end (and high-price) grocery chain Whole Foods, which was available after quite a few periods in which it struggled to turn in the results expected of a chain that had itself been a disruptor in its early days.
It’s not a done deal as shareholder and antitrust approval still has to be forthcoming. But on the assumption that it will happen, it’s the e-tail pioneer’s biggest move into physical retailing yet. Given the effects Amazon’s online ops have had on the sales and market share of many retailer’s across numerous product categories, it’s no surprise that this new move saw rival grocery chain shares falling on Friday.
Analysts think the impact of this purchase will be to drive down prices and dent profit margins for rivals, as well as transforming Whole Foods’ in-store experience as Amazon really gets to work on it.
Its first effects will be felt in North America and the UK, where Whole Foods’ business is focused at the moment (in fact, one branch is just next door to WGSN’s own London HQ).
On the surface, the purchase gives Amazon an instant entry into grocery retail. It has been working on the market for several years through its slow rollout of Amazon Fresh and its still-at-test-stage Amazon Go concept. But this buy means it now potentially has 460 stores in urban locations, all of them specialising in organic/natural products.
Given its clear ambitions to grow in grocery, the move makes sense. While online grocery ordering is growing (in the UK one in seven grocery shoppers now buy online), analysts estimate that only a maximum of 2% of the grocery market is online overall globally. Consumers are still resistant to e-buying perishable foodstuffs, which is a shame as they’re the items that people repeat purchase the most often.
Shares up, shares down
While Whole Foods has been struggling and its share have suffered, the purchase price is at a 27% premium to its last price before the announcement. Whole Foods’ share rose as a result but the shares of as many as 20 US supermarket firms fell, wiping at least $40bn off their collective market value.
Walmart and Target may have lost less than 5% of their value but Costco lost over 7%, SuperValu almost 15%, and Kroger nearly 10%. Shares in companies making the packaged goods these grocers sell fell too on the back of concern over intensified pressures on their own margins and fears that Amazon could move into selling such goods under its own brand.
Amazon shares rose as well, although by less than 3% with credit agency S&P Global expressing some concerns about debt levels.
The view from the top
Amazon itself is the one company that has said very little about the deal, apart from praising the Whole Foods business. But a spokesperson did add that there are no plans to turn Whole Foods into an automated retailer with cashiers replaced by scanners and AI.
Sources said that Amazon was the driving force behind the deal, having approached Whole Foods’ CEO and receiving an enthusiastic response. We know that the CEO, John Mackey, will stay in his role despite seven consecutive quarters of falling comp sales.
Mackey had earlier accused some hedge fund shareholders who had been pressurising the company to sell of being “greedy bastards” who were talking down the reputation of the chain.
He said of the Amazon deal: ”This partnership presents an opportunity to maximise value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers.”
He also promised to keep quality high: ”No artificial flavours, colours, preservatives, sweeteners or hydrogenated fats will ever be in any of the food we sell. Meat will still come from animals raised with no-added growth hormones, ever.”
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