The Fate of Grocers After Amazon-Whole Foods

The future of the U.S. grocery industry took a dramatic turn on June 16 when Amazon.com announced its $13.7 billion offer to buy Whole Foods Market. Amazon (ticker: AMZN) exchanged approximately 3% of its enterprise value for Whole Foods Market (WFM), arguably the most credible brand in the grocery-store industry, a sector which represents approximately 20% of core consumer spending in the U.S. In the week that followed, the market value of Amazon increased by approximately $18 billion — more than compensating for the price tag of what was its largest acquisition to date. Over the same period, shares in Wal-Mart Stores (WMT) dropped 5%, Kroger (KR) tumbled 8%, Target (TGT) declined 9%, Costco (COST) slumped 13% and Supervalu (SVU) plunged a whopping 22%. The message from the market is clear: The disruptive influence of Amazon’s expansion within the estimated $800 billion U.S. grocery market means there is now less visibility into the future health of incumbent grocers.

There are three primary reasons for that change in outlook:

·         First, existing bricks-and-mortar grocers have profitable physical businesses to protect.

·         The second problem is how to fund the required investment.

·         The third hurdle that may prove to be the most problematic over the long haul — brain drain. The inability to attract the best talent is an often insurmountable headwind for organizations in stagnant or declining markets.

Some have concluded that Amazon’s purchase of Whole Foods validates physical stores, but it’s more nuanced than that and the transaction isn’t a radical departure in strategy. The value engine for Amazon’s retail business is Prime and it is rightly focused on increasing the value of a Prime membership over time. One way to do that is to increase the frequency with which members interact with the Prime ecosystem. Food is the category people consume most frequently and the family shopping list does not change much from week to week. In that sense, grocery is a critical enabler of both frequency and loyalty.

Source: www.barrons.com