What Does Amazon’s Whole Foods Acquisition Mean for the Retail Market?

Through its Whole Foods purchase Amazon is completing the fresh food puzzle piece for its business, but is it too late for Whole Foods?

Amazon.com is acquiring organic supermarket chain Whole Foods Market for $13.7 billion, including Whole Foods net debt.

“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and CEO. “Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.”

“This partnership presents an opportunity to maximize 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,” said John Mackey, Whole Foods Market co-founder and CEO.

Reuters reported that Whole Foods recently had come under pressure from activist hedge fund Jana Partners LLC, prompting it to overhaul its board.

Post acquisition, the supermarket chain will continue to operate stores under the Whole Foods Market brand. John Mackey will continue as chief executive of Whole Foods, and the company’s headquarters will remain in Austin, Texas. But Whole Foods can now use Amazon’s buying power to purchase and potentially sell goods at a lower cost.

This purchase marks Amazon’s largest acquisition and move into brick-and-mortar retail. Amazon and Whole Foods expect to close the deal during the second half of 2017.

“Fresh foods are the final frontier for Amazon. And figuring out how to get it to your front door is the ultimate in convenience for consumers. In order for amazon to get the volume growth they are looking for, fresh foods has to be part of the equation. This deal gives them credibility with consumers and a major foothold in that space,”  David Portalatin, vice president, industry analysis, Food, The NPD Group.

“For starters, this acquisition promises to shake up pricing, the ecommerce space, the trajectory of retail automation in the U.S., and the already considerable competitive pressures faced by existing food retailers,” said Todd Maute, a partner at the New York-based brand agency and retail environments consultancy CBX. “When it comes to making bold moves aimed at disruption, Amazon never disappoints.”

Amazon Complete the Fresh Equation
Amazon is already the biggest e-commerce player in America. In fact, some 42% of consumers bought something from Amazon last year, and a full 60% of Millennials are Amazon shoppers, according to The NPD Group. By contrast, just 20% of American consumers bought at least one item from Whole Foods last year. That is down three percentage points from the prior 12 months. But among Millennials, the number is substantially higher: 24%—extraordinary penetration for a supermarket chain with just 431 stores.

The acquisition of Whole Foods now gives Amazon control of those 431 stores, nearly all of which are in neighborhoods that are more affluent and younger than America as a whole. NPD Group explained that 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 Millennials who already buy other items from Amazon.

“The possible effects on Whole Foods alone are interesting to contemplate,” said Maute. “For example, the consumer perception of Whole Foods is that it is overpriced. But given its massive buying power, Amazon could actually leverage its economies of scale to bring down prices in the aggregate and change this perception in ways that would make Whole Foods a lot more competitive.”

Maute added, “Now Amazon can give its Prime Customers a lot of new options. They could get discounts on popular Whole Foods products just by saying ‘Alexa, order me some more Whole Foods 365 peanut butter, organic, creamy.’ It’s a potentially big step forward in this fast-growing space.”

Of the people who already buy groceries through the Web—52% of them are Amazon Prime members, according to research from The NPD Group. Those 431 stores suddenly make it easier for those Prime members, who tend to purchase heavily through Amazon, to get access to fresh produce/foods.

Deal Not Without Risk
“This deal makes sense  but it’s not without its risks,” said Michelle Grant, head of retailing at Euromonitor International. Amazon has always wanted to become a big player in grocery. However, there are challenges to selling groceries online, such as inconvenient and expensive delivery. It is also difficult to pick produce. By buying a physical grocery with a customer base similar to its own, it now has the physical presence that is the most efficient, best customer experience for shopping for groceries.”

Grant added that Amazon has had a lot of opportunity to bring its digital expertise to the physical realm, but Whole Foods has been under pressure for a while, causing customers to flock from the retailer and into other grocers where they are now able to find similar product but at less expensive product. These impressions of Whole Foods, may be hard to shake, even for the likes of Amazon.

“Whole Foods may be difficult to turn around,” Grant said.

One reason, is that the market has become a lot more competitive.

“Amazon is notorious for lowering costs and passing those savings onto consumers. Its investors are very patient with the company. I believe that Amazon will let Whole Foods become more aggressive on price,” she said.

Grant noted Amazon is likely to work with its existing delivery products (AmazonFresh, AmazonFresh Pick Up, PrimeNow) to offer a range of delivery options for minimal pricing, which will put more pressure on grocery retailers to offer these options as well.

“Another issue is that it could accelerate the sales of online groceries because Amazon may leverage Whole Foods’ relationships with suppliers to sell on the Amazon.com website, which has 300 million customer accounts,” she added.

Grant warned that with a better assortment online, this could also put pressure on competitors who don’t have an online presence.

Walmart likely doesn’t have to worry. “Walmart has been working to improve all of these aspects of its business. It has been aggressive on price, mostly to defend against discounters, like Aldi and Lidl. It is rolling out click and collect throughout its stores. It brought on Marc Lore, an experience ecommerce leader, to run Walmart.com. It has prepared for this day,” Grant said.

What’s more, Whole Foods’ and Walmart’s customers are very different. “Whole Foods customers had been happy to shop at other retailers, including Walmart, for similar products at less prices. It’s unlikely that a Walmart customer will shop at Whole Foods, even if Whole Foods continues to lower its prices. I don’t think Walmart is under as much pressure as other high-end grocers, such as Kroger, but you can never rule Amazon’s impact out entirely,” she said.

Grant warned that it is the grocery retailers that are regional and/or in the middle of the market that will suffer the most, which she added is not a new trend. “The higher-end grocers and low- end grocers have done well at the expense of the middle. Market exits and consolidation have been happening and this is likely to speed up.”

Euromonitor data show that food and drinks internet retailing has registered 20.9% CAGR growth globally and 9.4% CAGR Growth in the USA in 2011-2016.

 

 

 

 

 

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