In the short term Amazons foray into the grocery business with the acquisition of Whole Foods is unlikely to affect Walmart. But is the market big enough for both?
After Amazons $14bn acquisition of Whole Foods, the stage is set for an epic clash between the online behemoth and the traditional retail king of America, Walmart.
On one side, a business with an advanced online operation but little physical presence. On the other, a retailer with a huge physical presence but an underdeveloped digital side. Their battlefield of choice? The $800bn US retail food market.
After the deal was announced, Amazons role in gutting bricks-and-mortar retail caused stock in rival grocery businesses including Kroger, Costco and Supervalu to fall by as much as 17%. Such losses were mirrored by larger retailers, including Walmart, whose stock fell as much as 7%.
The deal also raised questions about Amazons accumulation of power. But the US commerce secretary, Wilbur Ross, rejected anti-trust considerations, telling Fox Business Network he had not seen anything that Amazon has done that would qualify remotely for anti-trust consideration.
The size of a company was not in itself a problem, Ross said. Take their acquisition of Whole Foods. I think thats a very clever move to marry together a very good, high-quality, niche retailer with the very broad brush approach of marketing everything that Amazon has done so well. But I surely dont see any anti-trust implications in that.
The success of Amazons entry into the grocery business is not assured. Delivering fresh food is hardly the same as delivering books and clothing last mile delivery of perishable goods to customers is notoriously problematic.
Whole Foods 460 stores, however, give Amazon a high-end distribution chain, including a delivery service and the ability for Amazon to expand into markets to which it previously had no access. Whole Foods gets Amazons massive cache of consumer data and technology.
Analysts say that while the hook-up could affect other grocery chains, including the upscale Kroger, its unlikely to affect Walmart, at least in the short term. The Bentonville, Arkansas-based company is the largest seller of food in the US, generating more than half its $486bn annual revenue from groceries. With 4,700 stores, Walmart has enjoyed a rare advantage, even as it struggles to compete with Amazon online.
Last week, as the Amazon-Whole Foods deal was announced, Walmart fired back with its $310m acquisition of Bonobos, an innovative clothing retailer. That was the the companys fourth e-commerce acquisition since it paid $3.3bn for the e-commerce site Jet.com last year and placed founder Marc Lore in charge of its e-commerce operations.
Analysts point out that Whole Foods and Walmarts grocery business are not natural competitors. Whole Foods stores are concentrated in wealthier, higher-density markets. Walmart is focused on lower-income, lower-density areas.
Nor, says Michael Pachter of Wedbush Securities, do their customer bases overlap. According to data from Kantar Retail, only around 9% of households who shopped at Whole Foods in April also shopped at a Walmart.
Walmart customers were late adopters of Amazon Fresh (Amazons grocery delivery service) and Amazon Prime, Pachter says, so theyre going to be late adopters of the Whole Foods premium experience.
Over time Walmart is likely to expand its grocery business, just as Amazon plans to do. Groceries ensure customers return frequently and not only when they need a new appliance, and can therefore be run as a zero-margin business a terrifying notion to grocery rivals.
As Pachter points out, no other sector in the economy besides rent or mortgage payments accounts for monthly outgoings so significant or consistent. Groceries, he says, matters because it is huge.
Walmart wants to sell everything and Amazon is called the everything store. Groceries are a significant driver of other purchases. So the trick with Amazon may be to get trucks equipped so they can deliver groceries and TV sets. You have to assume that ultimately the biggest grocers and retailers are going to suffer equally.
Amazon, with 50 million Prime customers in the US, may also be looking to adapt its grocery services to include a lower price point.
The company recently cut fees for its Prime membership program to people on government food programs nearly 20% of the US population, a move suggesting that the retailer plans to expand its services to lower-income consumers. That should also send a message to Walmart, which generates around $13bn annually in sales revenue from customers receiving food assistance.
Last week, at a Whole Foods store in downtown Manhattan, many customers said the companys reputation for inflated prices was overblown and its products unfairly associated with consumer indulgence frivolity.
Exiting with two bags of groceries, Lisa Miller said: Honestly, I dont know why it was so criticized. It has great policy, the food is amazing. Maybe its a dollar more than the grocery store but Id rather pay for the quality.
Amazons expansion into food sales and distribution comes as it scales up its distribution infrastructure. Earlier this year it announced a $1.49bn worldwide air services hub at Cincinnati/Northern Kentucky international airport and the leasing of 20 Boeing 767 air cargo planes.
In order to compete with Walmart, however, Amazon-owned Whole Foods may have to lower prices and force existing stores to conform, a move that appears antithetical to the culture of the John Mackey-led chain, where individual stores were given a degree of autonomy.
The Amazon takeover may also come just in time. Over the past year, Whole Foods had begun closing underperforming stores and reducing its expansion program. Hostile actions by the equity fund Jana Partners forced several changes in the boardroom.
In Manhattan, Whole Foods customers said they welcomed the deal.
Amazon is moving into food, so Amazon and Walmart are going to be head to head, said Shayne McQuade, by trade a designer of solar backpacks. It might be the beginning of a new era.