“There is a lot of change in the food retail industry, both in terms of the operating environment and the competitive landscape,” he said. “We know there is a lot of upheaval in the food retail industry.”
On Friday, that remark became a historic understatement.
“The ramifications for all of retail are seismic—not just retailers that sell grocery, but for everyone,” according to Gordon Haskett’s Chuck Grom.
Brick and mortar grocery stores are no longer safe
The online retail boom has been devastating for brick-and-mortar sellers of electronics, clothes, books, and many other goods where price and convenience are priorities for consumers. While online grocery shopping has been around for a while, it was never considered a major threat to traditional grocers like Kroger and Safeway. That is, until now.
“The acquisition says as you look toward the future, you can’t just do brick and mortar groceries and you can’t just do online groceries,” according to Needham’s Kerry Rice. “A big piece of this is logistics, where the grocery stores haven’t been able to do well—Getting it to you quickly and building out a network.”
Barclays’ Karen Short called the deal “Darwinism at its best.”
Whole Foods, which traded as high as $65 a share in October 2013 before falling to under $30 earlier this year, had tried vigorously to push through an online strategy amid declining sales and pressure from activist investor Jana Partners (which revealed in April it had built a 9% stake in the company).
In November 2015, the organic food pioneer outlined a nine-point turnaround plan to combat declining sales, and CEO John Mackey specifically emphasized digital strategies as part of that.
“We will invest in digital strategies to convert the strong traffic we generate online into sales,” he said during the company’s conference call that month. “We have integrated Instacart into our app, will soon launch a national sales flyer, and will continue to make upgrades to provide more functionality and streamline our customers’ digital experience.”
Mackey continued to tout digital initiatives on the company’s latest conference call, which included a partnership with Instacart for direct delivery to customers fulfilled out of its stores. The company has also made additional investments in an e-store for catering along with meal delivery with DoorDash.
However, these initiatives have failed to move the needle. In the first quarter of 2017, the grocery chain said comparable store sales fell 2.8%, the seventh straight quarter of declines, just as they rejiggered the board of directors with new retail leadership.
Groceries as a way to sell other stuff
This slow shift to digital sales by traditional names has been a cloud over the retail industry more broadly, from Macy’s (M) to Nordstrom (JWN) and beyond. While some brands and industries have been able to dodge this change, today’s deal is a sign that no industry is safe from disruption.
The deal is not just about pain for grocery chains. It’s also about Amazon gaining a new channel for sales in other categories, according to Morgan Stanley’s Brian Nowak.
“Grocery is also an important order/traffic velocity driver, given the average US consumer visits the supermarket 1.6 times per week,” Nowak said. “As such, Amazon’s ability to capture this traffic flow creates upsell opportunities across its other categories.”
Plus, grocery shopping is a significant portion of consumption, accounting for 30% of total US personal spending, according to Morgan Stanley.
Before today, Amazon’s entry into the $800 billion grocery business has been focused largely on Amazon Fresh, which it started a decade ago. The deal confirms the company’s commitment, allowing it to quickly enter the category without upfront build-out costs (Whole Foods has about 460 locations, with the majority in the US).
Amazon’s Whole Foods could wreak havoc on prices
Injecting Amazon’s DNA into Whole Foods’ business could create an incredible challenge for the supermarket industry.
“We anticipate Amazon’s ownership is likely to result in lower prices at Whole Foods, forcing other grocery participants to follow, negatively impacting category margins,” according to Stifel’s Mark Astrachan. “There is a generally strong correlation between price and comp store sales growth, and we also note Amazon has largely foregone profits in other categories in which it competes, which we believe is likely to happen with Whole Foods/grocery.”
In other words, profitability may not be the top priority for Whole Foods, which puts even more pressure on peers to implement what are called “price investments” in the industry, which is another way of saying lowering prices.
This comes at a time of increasing competition over price, which Kroger noted on their conference call Thursday. And beyond online, the brick-and-mortar landscape has already been increasingly challenging and competitive.
Whole Foods’ leadership in the natural food category paved the way for others to expand in the category. Big-box retailers like Costco (COST), Target (TGT) and Walmart (WMT); traditional grocers like Kroger and privately-held Wegmans; and convenience stores like Walgreens (WBA) have all gone organic. Specialty organic rivals have flexed their muscles as well, with names like like Sprouts Farmers Market (SFM) and privately-held Trader Joe’s growing rapidly.
Amazon’s announcement didn’t come with too many details, keeping with the company’s reputation of disclosing minimal information about future plans. So for now, all we can do is speculate. But it’ll certainly be interesting to see how it all unfolds.
Nicole Sinclair is markets correspondent for Yahoo Finance.
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