Amazon.com Inc.’s announced $13.7 billion acquisition of upscale grocery chain Whole Foods on Friday represents a turning point for the grocery industry according to some analysts.
“It means they no longer have the luxury of waiting to see if online grocery will become a trend,” says Forrester Research Inc. analyst Brendan Witcher, who specializes in e-commerce. “While online grocery is a small percentage of total grocery today, Amazon will certainly have an impact in the future on consumers’ willingness to try and adopt this method of grocery shopping.”
If it goes through, the deal would be the second largest U.S. grocery deal ever according to Mergermarket, and the fourth largest retail deal in the U.S. dating back to 2001.
Tom Caporaso, CEO of e-commerce platform provider Clarus Commerce, says that by investing nearly $14 billion into acquiring Whole Foods, Amazon is making clear it intends to be a major food retailer.
“Grocery is a huge spending category and Amazon now has a really big distribution partner with the Whole Foods acquisition,” he says. “They’ve been dabbling in groceries for a while. This puts any dabbling or any piloting to the side and lets them jump in with both feet.”
Amazon’s move puts pressure on grocers large and small, say retail industry experts.
“This is such a powerful combination from a grocer’s perspective that they need to start finding their version of fulfillment that can match Amazon,” says Mario Natarelli, managing partner of marketing firm MBLM. “It’s earth-shattering for a grocer that is on the outside looking in. If you combine the identity of Whole Foods with the fulfillment power of Amazon, that’s a pretty formidable combination.”
“It does give Amazon an accelerated entry point into a great brand, very well respected and a great entry point into metro areas that it probably was pursuing anyways but significantly faster,” adds Keith Anderson, senior vice president of strategy and insights at price-monitoring firm Profitero. “It gives them a head start on what some have reported is their goal to be a top five grocer in under a decade.”
Amazon’s acquisition of Whole Foods, which is expected to close in the second half of the year, brings together a logistics and fulfillment powerhouse in Amazon with a retailer in Whole Foods that has built its reputation on offering high-quality and organic food products.
Anderson says 67% of Whole Foods’ sales come from perishable goods, such as meat and produce, as opposed to such non-perishable items as canned goods and paper towels.
“This gives Amazon a much more sophisticated perishable sourcing and merchandising operation,” he says.
That, Anderson says, could be one of the reasons why Amazon finds Whole Foods to be so attractive.
Amazon launched its own grocery delivery service, AmazonFresh, in its hometown of Seattle in 2007 and has since expanded to a number of major markets including Boston, Chicago, and London. Anderson says one of the areas that Amazon struggled in with AmazonFresh was with the quality of produce that it offers. Acquiring Whole Foods, he says, gives Amazon instant credibility with high-end grocery shoppers.
“They made some short-term sacrifices in their perishables quality that made it tough for Fresh to compete for the perishable grocery basket,” he says. “You can’t miss how important Whole Foods’ sophistication at sourcing and merchandising perishables is.”
To compete with the Amazon/Whole Foods combination, Tom Buiocchi, CEO of facilities management platform provider ServiceChannel, says smaller grocery chains are going will have to make in-store grocery shopping more engaging for shoppers.
That can include cooking classes and providing recipes, he says. “There’s a tremendous amount of things that they can do,” he says. “It’s a combination of what I go into the physical location for and what I do as part of the online experience.”
What isn’t clear is how Amazon acquiring Whole Foods impacts Whole Foods’ relationship with grocery delivery app Instacart.
Whole Foods took a stake in Instacart last year. Whole Foods doesn’t sell through its own website, rather its shoppers can order its products through the Instacart app.
An Instacart spokeswoman says the company remains optimistic about its future despite this latest news.
“From the beginning, we’ve been committed to helping grocers compete online,” she says. “That’s more important than ever given Amazon just declared war on every supermarket and corner store in America. We already work with over 160 retailers across the country and look forward to partnering with many more.”
Whole Foods did not immediately return a request for comment.
Profitero’s Anderson thinks Instacart will be fine with or without Whole Foods because Instacart has expanded beyond markets where Whole Foods is a major player.
“Instacart, while it got a lot of its business from Whole Foods, has increasingly been entering tier two markets and partnering more with the mainstream supermarket industry,” he says. “I think they’ve got a foothold that they can defend. It might put pressure on their economics if they lose their foothold with the upper-income customer base. I don’t think they’re existentially threatened by this. I do think it’s a challenge.”
Daphne Carmeli, CEO of same day delivery service Deliv, says Amazon acquiring Whole Foods could prove ominous for Instacart.
“Instacart will get killed unless Amazon bought Whole Foods for its stake in Instacart,” she says. “If this is the case, then Amazon would own digital grocery.”
Instacart isn’t the only grocery delivery app that allows shoppers to buy groceries from Whole Foods, though it is the only grocery delivery app that Whole Foods has invested in. Shipt also delivers groceries from Whole Foods. Shipt founder and CEO Bill Smith says he’s not concerned about the potential impact that Amazon’s acquisition of Whole Foods on his business.
“Amazon’s planned acquisition of Whole Foods Market is further validation that the grocery industry is moving online,” he says. “As we continue to grow and expand our online grocery marketplace, we’ll hold tight to our core values and continue to work in collaboration with the industry’s best retailers.”