How Bezos's grocery shopping shakes up an $800bn industry

2017-06-19 07:21 - Matthew Boyle, Bloomberg
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Jeff Bezos

Amazon CEO Jeff Bezos laughs during an interview in Cupertino. (Ben Margot, AP, file)

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New York - Since its founding 23 years ago, Amazon has upended the business of selling books, music and just about everything else we consume - except food.

Not anymore. In one fell swoop, Amazon founder Jeff Bezos charged into the supermarket business with the $13.7bn acquisition of Whole Foods. The surprise deal shakes up the $800bn grocery sector - and the broader retail industry itself - by marrying Amazon’s vast scale and digital prowess with Whole Foods Market’s 460 stores and fresh-food distribution network.

The acquisition threatens traditional grocers such as Kroger, which were already reeling from food deflation and encroachment from new competitors like German discounters Aldi and Lidl. Shares of rivals took a hit. The deal will likely spur other companies to defend themselves with their own buying sprees, consolidating the fragmented industry of feeding Americans.

“This is a game changer,” Zachary Fadem, an analyst at Wells Fargo, said. “It’s a warning shot for the food retail industry that competition likely heightens on top of an already challenging backdrop.”

The deal comes after Amazon spent nearly a decade trying to find a way into the fresh-food delivery business through various endeavours, without much success. None other than Whole Foods  CEO John Mackey once predicted that Amazon’s quest for grocery deliveries would be “Amazon’s Waterloo.”

Now, Bezos will be Mackey’s boss, and the combination of those two pioneers could upend the staid supermarket business. Amazon’s various forays into selling groceries - Amazon Fresh, Amazon Pantry, Prime Now - will get a boost from Whole Foods’s store network and its loyal, affluent customer base.

‘Whole paycheck’

Only about 1% to 2% of the industry has moved online, although that figure was expected to rise to 6% over the next five years because millennial consumers are almost twice as likely to purchase groceries on the web, according to Stifel Nicolaus  analyst Marc Astrachan.

Amazon’s ownership will also likely result in lower prices at Whole Foods, whose expensive products like $30 emu eggs earned it the nickname “Whole paycheck.” That could force other supermarkets to follow or lose customers, Astrachan said.

“Amazon has been in the food business for over 10 years and to now come to the conclusion that it needs physical brick-and-mortar stores is a pretty big deal,” Jefferies analyst Dan Binder said in a note. “Amazon gains expertise in grocery and organics in particular.”

That development challenges big-box retailers Wal-Mart - the nation’s biggest grocer - and Target, whose food business has floundered of late. Shares of all major food-selling US retailers, including drugstore chains like Walgreens Boots, were down more than 3% Friday.

Wal-Mart’s plan

Wal-Mart, which upended the grocery sector itself when it decided to add food to its general-merchandise stores in the late 1980s, has thus far parried Amazon’s advances. It paid $3.3bn last year for online marketplace Jet.com and offers curbside pickup of online grocery orders in more than 600 of its 4 700 US stores. Overall, the company’s US online sales rose 63% last quarter.

“They are on offense and that is a good position to be in,” Binder said, referring to Wal-Mart.

The acquisition could pose a bigger threat to Target, which has been building smaller stores in cities like New York to attract the affluent urban shoppers coveted by Whole Foods and Amazon, said consumer products research firm TABS Analytics CEO Kurt Jetta. More than 57% of Target’s regular customers use Amazon’s Prime membership program, according to consultancy Magid Associates, compared with 42% of all consumers.

“This could annihilate them,” Jetta said.

Wal-Mart, Target or others could respond with their own bids for Whole Foods, or for other food retailers such as Sprouts Farmers Market, which is now “100% in play,” according to Gordon Haskett analyst Chuck Grom. Sprouts didn’t respond to a request for comment.

Amazon’s takeout price of $42 a share undervalues Whole Foods’ prospects and powerful brand, according to Rupesh Parikh, an analyst for Oppenheimer. “There could be some money left on the table,” he said in a note to clients.

For now, Bezos has yet to disclose his plan for Whole Foods. Amazon held no press conference or analyst call, and the release announcing the deal was a scant 221 words long.

“Investors, analysts, competitors and suppliers are left guessing what Amazon may do,” Binder, the Jefferies analyst, said.

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