Amazon’s Whole Foods takeover: the death knell for UK supermarket shares?

Alongside being a book seller, book publisher, a marketing platform, a TV and film producer and electronic manufacturer, among other things, Amazon can now also claim to be a supermarket. In July of this year, the internet giant purchased Whole Foods Market, the US healthy foods grocer.

While Amazon has long sold limited amounts of food items online – primarily only to those signed up to its subscription services - the acquisition of Whole Foods represents its first serious expansion into the food market. The Whole Foods takeover has not only allowed the internet giant to expand the range of products it offers online, it represents the start of Amazon becoming a bricks-and-mortar food seller.

Considering Amazon’s track record, the news prompted markets to send supermarket shares into the red. In the US, Walmart, Target and Costco all took a hit, while Tesco’s shares fell by 5 per cent and Sainsbury’s by 4 per cent on the day the takeover was announced (16 June).

Following the completion of the takeover and subsequent slashing of food prices at Whole Foods on 28 August, supermarket stocks in both the US and UK fell again. Marks & Spencer saw it shares decline by slightly over 2 per cent, while Tesco suffered a strop of 1.68 per cent and Sainsbury’s fell by just under 1 per cent.

Will Amazon disrupt UK supermarkets?

An aggressive expansion in groceries by Amazon ‘is the last thing that the Big Four UK supermarkets need at the moment as they are already struggling to cope with fierce competition from discount store groups Lidl and Aldi,’ Ian Forrest, investment research analyst at The Share Centre, noted.

The UK’s largest supermarkets have been struggling for a number of years, being undercut by discount retailers, most notably the German-owned chains Lidl and Aldi. Moreover, the big four (Tesco, Sainsbury’s, WalMart owned Asda and Morrisons) have also struggled to compete with higher end, higher quality produce end of the market. Adding Amazon into this squeeze will only increase their woes.

Yet at the same time, right now, the availability of Whole Foods products in the UK remains fairly limited – and the acquisition has not immediately changed this. While Whole Foods products are now on Amazon Prime, this requires a pricey membership, and AmazonFresh, which delivers fresh food, is only available is certain parts of London. The plan, notes Forrest, is to ‘significantly expand its home delivery reach across the South East of England.’

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But Amazon’s Whole Food’s acquisition isn’t significant because it can now sell more organic products online. While Amazon eating into UK firm’s market share will only compound their problems, that isn’t likely to usher in any sort of revolutionary market disruption anytime soon. Instead, the key point is that Amazon is now substantially transitioning into a bricks-and-mortar food retailer.

However, when it comes to the UK, Amazon’s physical presence is lacking. In the US, Whole Foods has a fairly significant presence (albeit primarily in affluent areas or larger cities). There are only nine Whole Foods store in the UK. Of those, seven are in London. That leaves the rest of the country out of reach. That Amazon will stick to only those stores for offline sales in the UK seems unlikely – but how exactly it will expand its physical retail presence, though, is unclear.

Amazon does already have a distribution contract with Morrisons. Speculation of Amazon furthering that relationship in the future led Morrisons shares rose by 1 per cent directly after the Whole Foods acquisition (they did, however, fall by 1.44 per cent after the Whole Foods price cuts). However, that’s purely speculation right now: Amazon could cut ties at a later date. In the US there is, notes the Financial Times, ‘an elaborate guessing game about which targets might be on the radar of Amazon chief executive Jeff Bezos.’

Back to bricks-and-mortar

Amazon’s foray into food, however, does perhaps underline one perhaps positive point for UK supermarkets: their business models are not entirely broken. Amazon’s expansion into food (primarily in the US, for now) entails purchasing physical retail space allowing it to have a mix of online and offline sales.

On surface, that’s no different than the current models of most UK supermarkets. It is now recognised that there are no purely online shoppers. Physical retail space and offline sales matter too. Online commerce isn’t eclipsing offline: players in both markets are, or at least should be, attempting to gain dominance in both. On the one hand, supermarkets need to improve their online presence, while on the other, Amazon is attempting to become a bricks-and-mortar grocer.

This new dynamic can already be seen in the US. While Amazon is attempting to expand and ‘disrupt’ the US’s grocery market, traditional retailers are rapidly expanding into e-commerce. Walmart recently acquired, the fastest growing online retailer in the US, for $3 billion. The megastore has also launched an incubator in Silicon Valley. As Josh Brown, the CEO of Ritholtz Wealth Management recently noted in an interview with Market Place: ‘Amazon is starting to look more like a classic incumbent and Walmart is acting in a very aggressive way.’

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Amazon isn’t the only e-commerce giant banking on offline retail. The Chinese company Alibaba has now opened 13 food shops within China. This expansion of Alibaba offline is what the company’s founder Jack Ma, calls ‘new retail.’

So while Amazon’s expansion into groceries threatens to steal market share from food retailers, as is usually expected of an Amazon expansion into any sector, Amazon’s move into food is slightly different. This isn’t e-commerce undercutting traditional bricks-and-mortar retail: it’s e-commerce aping traditional retail. While UK retailers will have to further improve their online offering, the battle with Amazon will also be over offline sales. On this front, established supermarket may still have some home team advantage.

Of course, that may not be enough. Investors looking at UK supermarket shares should remain hesitant. As Forrest warns, ‘trying to maintain market share in the face of Amazon price cuts, along with trying to match their delivery offer, is all likely to require notable resources for the Big Four.’ At the same time, Amazon, with its deep pockets and logistical know-how, may very well end up outdoing UK supermarkets in bricks-and-mortar.

‘From an investment perspective,’ notes Forrest, ‘we have been very cautious on the UK supermarket sector for some time, and the speed with which Amazon has already moved in making changes to Whole Foods offer in the UK only underlines the challenge and adds to our wariness over the short and longer term.’

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