The biggest news of the past week was Amazon’s announcement that it is buying Whole Foods. What’s the big deal? This is just a run of the mill merger in dollar terms at $13.7 billion. In fact, it ranks as only the fourth largest merger in the history of the major domestic retailers, behind Supervalu-Albertsons, Walgreens-Rite-Aid, and Kmart-Sears. However, many retail analysts and investors think this is a watershed moment for the retail industry. The stocks of virtually every other retailer got crushed on the news.
Brick-and-mortar retailers fear the low margins and ruthless efficiency of Amazon, which captured an amazing 43% of all online retail sales in the U.S. for 2016. Amazon has been putting smaller and less efficient competitors out of business for the past 20 years. There is even a “Death-By-Amazon” index of the 54 companies that are most vulnerable to the rise of Amazon. The stocks of those 54 companies collectively declined by $32 billion in one day (on Friday) after the Whole Foods announcement. The biggest losers were Smart & Final (-18.75%), Supervalu (-14.36%), and Kroger (-9.24%). Some very strong companies with loyal customers also got hit, such as Costco (-7.19%) and Target (-5.14%).
Amazon vs. Walmart
I think the more interesting story is the battle of the super-giants. The traditional lines between online and brick-and-mortar retailers are rapidly disappearing. The biggest physical retailer (Walmart) and the biggest online retailer (Amazon) are squarely going after each other. Walmart is by far the bigger company, with $456 billion in sales compared to Amazon’s $136 billion. Groceries account for 56% of Walmart’s sales, and it is ramping up its eCommerce operations with last year’s $3 billion acquisition of Jet.com. Walmart is finally having success after years of fits and starts with its online initiatives. Its online sales grew 63% in the 1st quarter of 2017 from a year earlier. Walmart has 4,700 stores, 700 of which offer curbside pickup of online orders. Another 300 stores are expected to add curbside pickup this year. Ten Walmart stores are experimenting with home delivery of fresh foods.
The Whole Foods acquisition (assuming it is completed) will give Amazon 450 physical stores that it can use as pickup locations, with a refrigerated distribution network. This should accelerate the Amazon Fresh grocery initiative. However, it isn’t at all clear whether the king of e-commerce can do in fresh foods what it has been able to do in other product categories. Whole foods only had revenue of $16 billion last year, and Amazon and Whole Foods combined still have a small fraction of Walmart’s share of groceries. However, Amazon is growing much faster. Walmart’s total sales (combined online and in-store) are only growing by 1-2% a year, whereas Amazon’s total sales are growing at over 20%. Amazon and its investors have been willing to sacrifice profits for market share. Overall, Amazon has about half of the profit margin of Walmart.
The winner in all this will be consumers, who can expect better service and lower prices. Amazon is expected to cut costs and prices at Whole Foods, which some people refer to as “whole paycheck” based on their premium pricing. Most reports expect Amazon to cut jobs at Whole Foods and rely on technology to eliminate lines and better manage inventory.
This acquisition just accelerates where retail was already going. Amazon and Walmart will battle over price, assortment, and convenience, and other retailers will scramble to fill niches that can survive (e.g., Trader Joe’s – small stores, unique inventory, private label brands).
Any way you slice it, the grocery industry is changing. Strolling down the aisle and chatting with your favorite checker may be relegated to the nostalgia bin in another decade, just like renting VHS tapes at Blockbuster.
Have a great week.