Saturday, June 17, 2017
Online retail giant Amazon is making a bold expansion into physical stores with a $13.7 billion deal to buy Whole Foods, setting the stage for radical retail experiments that could revolutionize how people buy groceries and everything else.
Amazon could try to use automation and data analysis to draw more customers to stores while helping Whole Foods cut costs and perhaps prices. Meanwhile, the more than 460 Whole Foods stores in the U.S., Canada and the U.K. could be turned into distribution hubs – not just for delivering groceries but as pickup centers for online orders.
“The conventional grocery store should feel threatened and incapable of responding,” Wedbush Securities analyst Michael Pachter said.
Moody’s lead retail analyst Charlie O’Shea said the deal could be “transformative, not just for food retail, but for retail in general.”
Walmart, which has the largest share of the U.S. food market, has already been pushing harder into e-commerce to build on strength in its stores and groceries. It announced Friday that it’s buying online men’s clothing retailer Bonobos for $310 million, following a string of online acquisitions including ModCloth and Moosejaw.
But if Amazon can be the one-stop shop for everything – groceries had been one of the key missing elements – customers would have even less of a need to go to Walmart or elsewhere.
Amazon already offers grocery-delivery services in five markets, but analysts say expansion is tough because its current distribution centers are set up for dry goods, not perishables. Just two years ago, Whole Foods CEO John Mackey told Bloomberg BusinessWeek that Amazon’s foray into grocery delivery would be “Amazon’s Waterloo.”
But it was Whole Foods that fell behind as shoppers found alternatives to the organic and natural foods it helped popularize since its founding in 1978. Whole Foods has seen its sales slump and recently announced a board shake-up and cost-cutting plan amid pressure from activist investor Jana Partners.
Groceries are already a fiercely competitive business, with low-cost rivals such as Aldi putting pressure on traditional supermarket chains and another discounter, Lidl, opening its first U.S. stores just this week. Whole Foods itself had launched an offshoot chain named after its “365” private-label brand in a nod to the popularity of no-frills chains.
The Amazon-Whole Foods combination, expected to close by the end of the year, could put even more pressure on those chains and other big grocery sellers.
Amazon could try to cut operational costs at Whole Foods by using the same types of robots that already move inventory around at its e-commerce fulfillment centers.
The company also has been testing sensors at a convenience store in Seattle to track items as shoppers put them into baskets or return them to the shelf. Shoppers skip the checkout line, and their Amazon accounts get automatically charged. Gartner retail analyst Robert Hetu said Amazon could bring pieces of that to Whole Foods to further cut costs.
Both companies said there will be no layoffs, but they did not respond to other questions about Amazon’s plans for Whole Foods. Whole Foods will keep operating stores under its name. In an email to customers, the company said it planned to maintain the same standards under Amazon, including bans on artificial flavors and colors.