Amazon’s grocery push spells trouble for big food labels

ANNIE GASPARRO, LAURA STEVENS
June 27, 2017
The Wall Street Journal 

Amazon.com’s deeper push into the grocery business threatens to further pinch packaged-food companies already coping with slowing sales.

An enduring shift by consumers towards fresh and natural options is eating into the business of big food brands like Kraft Heinz, Kellogg and Mondelez International. They also face growing competition from store brands and upstarts.

Now, Amazon is preparing to expand into the sector with its proven history of aggressively driving down prices. Amazon has struck a deal to buy Whole Foods Market for $US13.7 billion ($18bn), including debt.

The company is likely to leverage its negotiating expertise and the combined scale of the business to push for lower prices from suppliers, sources say.

Amazon “will keep squeezing national brands on pricing”, said James Thomson, a former senior manager in business development at Amazon and now partner at brand consultancy Buy Box Experts.

Amazon’s initial priority would be to lower Whole Foods’ operating costs so that it can charge less for groceries, in the hope of winning more customers, according to people familiar with the company’s thinking.

Amazon and Whole Foods declined to comment for this article.

Whole Foods chief executive John Mackey told employees earlier this month that one of Amazon’s core values was “frugality”, hinting at a greater focus on cutting costs and lowering prices for shoppers. 

Whole Foods’ sales have suffered over the past two years, partly because of a perception among shoppers that its offerings are too expensive.

“If Amazon steers Whole Foods away from its ‘whole pay cheque’ image, and successfully sells Whole Foods’ products online, then ‘Big Food’ faces the threat of losing even more market share,” said Rabobank food analyst Nicholas Fereday. 

Mondelez’s comparable sales in North America declined by 1.9 per cent in its most recent quarter. Kraft Heinz’s US comparable sales fell 3.5 per cent, and Kellogg recently lowered its 2017 comparable sales growth forecast to negative 3 per cent, excluding currency rate fluctuations. Most packaged-food companies have turned to cost-cutting to boost their profit margins. 

Amazon has worked on developing its own private label, and last year made a big push into perishable food. Analysts and former employees expect the company to use Whole Foods to build out its own labels and capitalise on the grocer’s success with its 365 brand, which accounted for 15 per cent of its most recent fiscal year’s sales.

Amazon’s Whole Foods deal could also widen the reach of natural and organic brands by putting them online, making them more competitive with traditional, ubiquitous brands.

Alexander Pease, chief financial officer of pretzel maker ­Snyder’s-Lance, said at a conference last week that the deal would generate another “level of discussion with (retailers) around price”. 

But Susquehanna Financial Group analyst Pablo Zuanic said Amazon and Whole Foods’ combined share of about 4 per cent of US grocery sales would not have enough “clout” to hurt big food companies in the way of bargaining power. 

It could also take time before food makers started feeling pressure, because the deal had not been completed, and Amazon’s strategy for Whole Foods could shift, sources said. 

The deal is expected to be completed later this year.