After disrupting retail, is Amazon set to conquer the supermarket industry next? Offering a $13.7 billion bid to acquire the organic food chain, Whole Foods Market Inc., the e-commerce giant has thrown the U.S. grocery industry for a loop. The news, which came out late last week, was followed by tumbling stock prices of traditional grocery chains, and a rising anticipation of whether Amazon is on a mission to rule every possible segment of consumer goods.
We all know by now what e-commerce has done to the traditional brick-and-mortar retail in the U.S. The number of physical retail store closures this year is estimated to overshoot the levels seen in the crisis period of 2008, thanks to digital platforms eating away at the stores’ margins. Being the largest online retailer in the country, Amazon is at the forefront of this evolution. As if that wasn’t enough, it is now chasing its brick-and-mortar dream – in grocery. The announcement of Amazon’s proposed deal to buy Whole Foods led to stock price declines of -4.7% of Wal-Mart and -9.2% of Kroger on June 16. Whole Foods shares, on the other hand, soared close to +30% the same day, to edge past Amazon’s offer of $42 per share.
Amazon Needs Brick-and-Mortar for its Grocery Goals
The number of pure grocery stores in the U.S. have been declining since 2015 (as reported by CNN) But that’s largely due to brick-and-mortar retailers such as Walmart, Costco and Target expanding into the space. Online spending is still a meager 2% of the $600 billion annual grocery sales, according to Daphne Carmeli, CEO of delivery start-up Deliv. (as reported by CNN). Even Amazon’s online grocery delivery business, Amazon Fresh, has reportedly failed to make its mark in competition with physical grocery stores, contrasting its performance in other consumer goods. That seems to have pushed the e-commerce giant into upping its ante on grocery by purchasing an entire brick-and-mortar supermarket chain.
Will the Deal Be a Win-Win for Amazon and Whole Foods?
Amazon has been contemplating having a ‘physical presence’ for quite some time. From setting up a prototype of an in-house grocery store (Amazon Go) to recently introducing kiosks for consumers to pick up groceries ordered online, it is no secret that the e-commerce giant is gung-ho about expanding its footprint in grocery. Its offer to acquire Whole Foods is a further validation (and probably the biggest one) of its ambition. If the deal with Whole Foods gets inked, Amazon will automatically have access to the grocery chain’s 465 stores, which could mean an almost overnight proliferation of Amazon’s delivery/distribution hubs across the nation. Not to mention, the firm’s already extensive supply chain and use base will potentially get larger once it acquires Whole Foods’ operations.
Whole Foods, at the same time, could hope to get its ailing business back to life through the deal. The chain, known for its upmarket organic offerings, has had seven consecutive quarters of decline in same-store sales. It is also shutting down some stores. Many people are expecting Amazon to turn that around. The e-tail juggernaut is famous for prioritizing sales growth over profit margins. So, chances are that Whole Foods’ product prices would be slashed with Amazon stepping in. Lower prices are expected to attract more customers. Plus, Amazon’s penchant for cutting-edge technology could potentially bring down costs of operations over time along with offering new-age convenience to grocery shoppers.
Bottom Line for Investors
If Amazon’s proposal to purchase Whole Foods materializes, the deal could be a potential win-win for the two parties. But it would also take the already heated competition in the U.S. retail & food industry to a whole new level. There are already speculations of probable counter-bids for Whole Foods.
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