With the recent $13.7B blockbuster acquisition of Whole Foods (NASDAQ: WFM) by e-commerce behemoth Amazon (NASDAQ: AMZN), the grocery industry is panicking and investors are taking full notice. Competitive grocery chain Costco (NASDAQ: COST) is down by 12.73% or $22.93 to $157.13 since Thursday’s close. Companies like Kroger (NYSE: KR) down 7.98% or $1.96 to $22.60 and Target (NYSE: TGT) down 8.47% or $4.70 to $50.76 are all feeling the shocks of Bezos’ big move. The acquisition will result in Amazon acquiring approximately 450 Whole Foods locations nationwide while still maintaining the moniker “Whole Foods Inc.” as well as keeping CEO John Mackey on board as the company’s leader.
Courtesy of Food & Wine
What does this mean for the retail grocery industry at large? Let’s start by taking a step back and examining some of the industry’s recent trends. Supermarket competition has heightened in recent years as consumer preferences shift towards organically grown foods. However, at the same time, the high prices that many consumers have incurred because of this shift have deterred some from shopping at these organic grocers like Whole Foods, Sprouts (NASDAQ: SFM) and The Fresh Market, which was acquired by Apollo Global Management in 2016 for $1.36B. This increased demand has caused big players such as Kroger and Wal-Mart to enter the organic grocery segment. With larger players being able to execute their robust supply chains, the cost of organic and naturally groceries has fallen, causing organic grocers to lose sales revenue in recent years.
Additionally, many consumers have explored the option of having groceries and meal kits delivered to their doorsteps instead of traveling to grocery stores. Companies like Instacart and Blue Apron (IPO-Pending) provide an on-demand grocery-delivery service for customers and have thrived in recent years. Instacart recently raised $400M in its latest round of funding in March 2017 and has struck deals with Whole Foods, Costco, Target, and Safeway as well as over 130 other retailers to have groceries delivered from their retail locations to customers nationwide. Similarly, Blue Apron announced their filing with the SEC for an IPO to raise $500MM.
Lastly, as technology has become a more integral part of the modern retailer, many grocers are using technology to modernize their business operations. In 2012, Kroger introduced QueVision, a technology platform that provides real-time customer updates, predictive analytics, and operations tools to assist management with improving business processes. The company reported that QueVision has allowed them to cut down wait times from four minutes to 30 seconds, vastly improving the grocery shopping experience. The platform can even predict when a new checkout lane will be needed 15-30 minutes in advance due to an uptick in customer traffic.
These key trends will guide Amazon as they look to attain a significant market share in the industry. Thus far, the tech giant has positioned itself for success.
As competition has grown in recent years, Amazon has struggled to launch its own grocery-delivery service, Amazon Fresh. However, now that it has access to the more than 450 Whole Foods’ stores and the accompanying supply chain system, Amazon will not only be able to kickstart its own grocery-delivery business nationwide, but it will now also be able to provide products like books, shoes, and other goods that customers can pick up from their local Whole Foods. This display of pure convenience serves as an incentive for shoppers to pay additional trips to their local Whole Foods. This enables Amazon to lower both its delivery prices and the prices of its goods while at the same time competing for market share with the big brick and mortar players. Did I also mention that Whole Foods was already testing their own meal delivery kits in Massachusetts? Watch out, Blue Apron.
An Amazon Fresh delivery man prepares a grocery order for delivery (Bloomberg)
As technology has improved the overall customer experience in grocery stores, Amazon looks to deliver an unparalleled experience with its Amazon Go stores. Amazon could use its new chain of stores to expand its Amazon Go vision making all Whole Foods cashier-less and the epitome of efficiency. Additionally, shoppers could see Amazon Echo, Alexa and Dash, integrated into the shopping experience: “Alexa, where can I find sandwich meats?”, “Aisle 3.”
Overall, Amazon promises to deliver efficiency like we’ve never seen before to the grocery industry. With a vast array of products and services, Amazon has the ability to turn the industry on its head especially with services like Amazon Fresh, Amazon Go, and Amazon Restaurants. As Amazon’s plans unravel, investors should keep an eye on the competition as they respond to the significant changes the e-commerce giants makes to Whole Foods.
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