Charisse Jones & Zlati Meyer/USA Today – Amazon’s purchase of Whole Foods makes it a major player in the U.S. grocery market, and that leaves a lot for consumers and fellow retailers to chew on.
Experts say the move will translate into lower prices for consumers and more competition among traditional supermarkets, discount chains and food-forward big-boxes such as Walmart. And Amazon’s tech heritage could completely refashion grocery stores, from layout to merchandise mix to how shoppers get their purchases.
Amazon is now bringing its firepower to an industry plagued by thin profit margins. Whole Foods — dubbed by some “Whole Paycheck” because its prices are higher than those of regular supermarkets — has had room to coast on wider margins because it helped create and grow the organic food space.
But its promotion of natural foods proved to be such a hit that mainstream stores wanted a piece of this higher-margin action, too. They’ve increased the amount of organic produce, proteins and packaged goods they offer — and that’s cutting into Whole Foods’ business. “
Amazon has a great reputation for value. Bringing that mind-think to Whole Foods is going to be a big change,” said supermarket analyst Phil Lempert, who founded the industry website supermarketguru.com. “June 16 is going to go down in the industry as the day the grocery business changed.”
Shoppers can expect more than just extra money in their wallets when they leave their local grocery stores. They might see completely overhauled stores — smaller footprints and larger assortments of exclusive brands, which is the successful German approach already invading the United States. Lidl opened its first U.S. stores Thursday, and Aldi is planning to add another 900 American stores and remodel the majority of its 1,300 existing ones.
Amazon has its own branded products, too, such as pet supplies and batteries. Whole Foods is already onboard with that; the Austin-based chain has the well-regarded 365 Everyday Value brand, which last year it parlayed into a new affordable-price store concept called 365 by Whole Foods with four locations across the country and another 13 planned.
“Once Amazon is a player in the industry, anything can go,” said Joe Agnese, senior food retailing analyst at CFRA. “The big threat is what else they can do. Now that they have a retail presence with 400 stores, long-term they can expand on that threat. They can (bring) pricing pressure. They could bring down prices, and everyone would have to match them or lose share.”
Another possible in-store change is what food retailers put on their shelves — and in their refrigerators. Lempert predicts stores increasing the amount of fresh items they sell to as much as 50% — more meat and seafood, baked goods, and ready-to-eat and made-to-order foods — while reducing the amount of lower-margin center-store packaged items.
That dovetails with the click-and-collect model supermarkets are using now, which customers prefer to delivery.
“Delivery is interesting, yes, but click-and-collect has more legs. A lot of people don’t want to stay home and wait, or they think it’s not safe,” Lempert said. “Instacart delivery will be hurt. It was built on Whole Foods. … Also, AmazonFresh’s delivery model frankly hasn’t done a good job in perishables.”
But the Amazon-Whole Foods deal could invigorate grocery delivery, too.”
Amazon will use Whole Foods as hubs to deliver into neighborhoods. Other grocers, if they want to compete, will have to follow suit,” said Neil Saunders, managing director of GlobalData Retail.
According to experts, warehouse stores and dollar stores that are selling more food now than in the past have little to worry about, thanks to the limited overlap between them and Whole Foods. Ditto for Walmart.
More mainstream competitors, especially regional chains, will need to take a hard look at themselves, though.
“Some players, like Wegmans and Publix, are strongly differentiated. I don’t think they’ll lose because of that. The ones that are not so strong and differentiated are more likely to fall victim to the price squeeze, and you’ll see the shake-out. Other chains will look to buy these chains to consolidate,” Saunders said, pointing to Buy Low Market in California and Ingles in the South as examples of those that might struggle to survive.
One key way Whole Foods has always made itself stand out is its ethos — a dedication to healthy eating, sustainability and animal welfare. That doesn’t completely mesh with Amazon’s brand feel.
Not yet, anyway.
“What’s a little strange about it is Amazon hasn’t necessarily been focused on quality and service, and isn’t that what Whole Foods’ point of differentiation is?” asked Jeff Green, CEO of the Phoenix-based Jeff Green Partners, a real estate consulting firm that provides analytical and interpretive services for retailers and others across the U.S.
“Amazon is smart enough to make it work. Will their model be profitable instantly with Whole Foods? Probably not, but Whole Foods, as it is, is struggling.”