Amazon-Whole Foods acquisition stirs Wall Street

Amazon USAmazon has recently announced its $US13.7 billion plans to buy the upscale grocer Whole Foods.

The acquisition has shaken furthermore the retail landscape, particularly the company shares of Wal-Mart and Target.

“This deal makes sense but it’s not without its risks. Amazon has always wanted to become a big player in grocery. However, there are challenges to selling groceries online, such as inconvenient and expensive delivery. It is also difficult to pick produce,” said Michelle Grant, head of Retailing at Euromonitor International.

“By buying a physical grocery with a customer base similar to its own, it now has the physical presence that is the most efficient, best customer experience for shopping for groceries.  It has a lot of opportunity to bring its digital savvy to the physical realm. However, Whole Foods has been under pressure for some time as consumers left the retailer for less expensive, yet similar products at other retailers. [It] may be difficult to turn around.”

The deal by Amazon, a proven retail disruptor, marked a major step by the internet retailer into the brick-and-mortar retail sector. Wal-Mart shares sank 4.7 per cent, weighing the most on the Dow. Shares of Target, Walgreen Boots and Costco fell between 5 per cent and 7 per cent.

“Walmart has been working to improve all of these aspects of its business. It has been aggressive on price, mostly to defend against discounters, like Aldi and Lidl. It is rolling out click and collect throughout its stores. It brought on Marc Lore, an experience e-commerce leader, to run Walmart. It has prepared for this day,” Grant further explained.

“It’s going to send a shock wave across the board and this represents the true utmost in market disruption,” said Burns McKinney, chief investment officer with the Dallas investment team for Allianz Global Investors. “There [are] big winners and big losers.”

“The market become a lot more competitive. Amazon is notorious for lowering costs and passing those savings onto consumers. Its investors are very patient with the company. I believe that Amazon will let Whole Foods become more aggressive on price,” added Grant.

“Amazon is likely to work with its existing delivery products (AmazonFresh, AmazonFresh Pick Up, PrimeNow) to offer a range of delivery options for minimal pricing, which will put more pressure on grocery retailers to offer these options as well. Another issue is that it could accelerate the sales of online groceries because the [e-commerce giant] may leverage Whole Foods’ relationships with suppliers to sell on the Amazon.com, which has 300 million customer accounts. With a better assortment online, this could also put pressure on competitors who don’t have an online presence.”

Amazon shares gained 2.4 per cent, making the stock the biggest boost to the S&P 500. Whole Foods shares surged 29.1 per cent. The S&P consumer staples sector fell 1 per cent, by far the worst performing major sector. The S&P 500 food and staples retailing index dropped 4.2 per cent. Grocery chain Kroger was the biggest loser on the S&P 500, falling 9.2 per cent, while Supervalu dropped 14.4 per cent.

“I would not like to be somebody playing in the grocery space right now,” said Jan Rogers Kniffen, chief executive of retail consultancy firm J. Rogers Kniffen WWE in New York.

“Whole Foods and Walmart’s customers are very different. Whole Foods customers had been happy to shop at other retailers, including Walmart, for similar products at less prices.  It’s unlikely that a Walmart customer will shop at Whole Foods, even if [the latter] continues to lower its prices. I don’t think Walmart is under as much pressure as other high end grocers, such as Kroger, but you can never rule Amazon’s impact out entirely,” Grant said.

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