In the wake of online giant Amazon’s announcement that it was buying Whole Foods Market Inc., analysts and industry experts were trying to sort out what the $13.7 billion deal, announced June 16, could mean for the retail grocery industry.
Two things are certain: the effects will be many and huge, and the deal itself was a stunner.
“My initial reaction was ‘Wow!’ — almost a bit speechless,” says Neil Stern, a consultant with Chicago-based McMillan Doolittle. “While this has been rumored, I don’t think anyone actually thought it would happen.”
|Neil Stern, McMillan Doolittle consultant|
If the deal goes through, Whole Foods will retain its headquarters in Austin, and its chief executive officer, John Mackey, will remain in that position, according to a company news release. Whole Foods will continue to operate under its current banner and source from established vendors and partners.
Perimeter-store grocery departments like deli and bakery should see a big impact from the deal, Stern says.
“Fresh has been Amazon’s Achilles’ heel,” he says. “Whole Foods’s reputation should help many of these categories grow online.”
Darren Seifer, food and beverage industry analyst for the Port Washington, NY-based NPD Group, agreed.
“Fresh foods are the final frontier for Amazon’s grocery strategy, and its pairing with Whole Foods will help get fresh foods to the doors of its target audience, like Amazon Prime members,” Seifer says. “Fifty-two percent of online grocery shoppers are Amazon Prime members.”
|Darren Siefer, NPD Group analyst|
Bill Bishop, chief architect and co-founder of Barrington, IL-based Brick Meets Click, says perimeter-store departments in Amazon-era Whole Foods stores could benefit from innovations such as kiosks where both e-commerce orders could be placed and grab and go items sold.
“If they do that they become pretty interesting competitors to smaller convenience stores,” Bishop says.
Bishop says Amazon could also use the Whole Foods platform to launch its own private label brands to complement Whole Foods’s 365 branded items.
And he says the chances are good that Amazon will bring the technology used at its Amazon Go store to Whole Foods. At Amazon Go, shoppers buy items via smart phone, avoiding checkout lines entirely.
“When you build a better mousetrap, the mousetrap solves a lot of problems,” Bishop says. “The whole notion of being in line, taking all of your items out of a cart, then having someone else handle them — it doesn’t seem like it should be necessary in today’s world.”
|Bill Bishop, Brick Meets Click co-founder|
In addition, he says, such a system creates huge efficiencies. Instead of having to wait hours to make replenishment decisions, they’re made as soon as the consumer scans their items in the aisle.
The effects of the deal on retail grocery in general will be felt far and wide, Stern says.
“It changes the dynamics completely,” he says. “It will accelerate the growth of e-commerce in grocery significantly.”
E-commerce currently accounts for just 1.4 percent of grocery sales, Stern says. Expect that share to increase significantly over the next five years.
“Traditional retailers will be hard-pressed to respond.”
Seifer said that just as Amazon has raised the bar in logistics and technology in other consumer goods sectors, it will do the same with grocery.
“Other online grocers and brick-and-mortar grocers will need to step up their game to compete,” he says.
Brick-and-mortar stores can still leverage their experience to meet consumer needs in ways online grocers can’t, Seifer says, but they also will need to leverage digital ordering via their own click and collect programs and partner with third parties for delivery in order to expand their offerings.
Amazon/Whole Foods’s competition will not be Wal-Mart or heavy discounters like Aldi and Lidl, but the “everybody else” category that accounts for about 55 percent of all industry sales, Bishop says. The leader in that category, Kroger, should hold its own, given its commitment to cut costs, he says, but others won’t be as fortunate.
“I believe there are a number of really good independents that will survive quite well, and there are a number that will not. And it’s the same for the chains. I expect Whole Foods to be very disruptive and growing inside that 55 percent.”
The deal gives Whole Foods a better distribution network and better buying power, and Amazon access to more than 400 prime retail spots, says David Livingston of Waukesha, WI-based DJL Research.
Other stores in the natural foods/organic realm will be those most likely to suffer, Livingston says.
“All those wannabe Whole Foods type competitors with B locations and too much debt will probably be consolidating.”
Amazon has reportedly been looking to open brick-and-mortar retail stores for some time.
The Amazon/Whole Foods transaction is expected to close later this year and must be approved by Whole Foods shareholders and meet regulatory and other closing conditions.
The deal follows six consecutive quarters of same-store sales declines for Whole Foods. The chain also announced recently it would close nine of its 469 stores.