(Bloomberg)—It’s one year later and everything and nothing has changed.
Amazon.com Inc. rattled the relatively sleepy grocery industry with its $13.7 billion deal to buy Whole Foods Market last June. Since then, the pioneering organic grocer has disappeared into the embrace of the e-commerce giant, making it difficult to tell whether Whole Foods has turned around from the slump that made it a takeover target in the first place.
For now, it might not matter.
Amazon, No. 1 in the Internet Retailer 2018 Top 1000, has said very little about its grocery strategy, but its presence has reverberated through the industry, prompting competitors like Walmart Inc. (No. 3) and Kroger Co. (No. 86) to invest billions of dollars to keep prices low and improve their digital capabilities. As German discounters Lidl and Aldi continue expanding in the U.S., fueling an intense price war, the grocery industry is as competitive as it ever has been. Here’s a look at the current state-of-play:
The stores don’t look all that different. But it’s much tougher to know how Whole Foods is doing under Amazon. The online leader is expected to easily surpass $200 billion in revenue this year, and its grocery chain is barely mentioned on earnings calls. Earnest Research, which analyzes credit-card data, recently found that customer traffic was up 2.4% at Whole Foods stores during the first five months of 2018, a sign that Amazon has managed to draw in new shoppers with ballyhooed price cuts on a handful of items.
Still, sales have been sluggish. And the customers who are shopping there are spending less, according to a separate report from the research firm Second Measure.
Kroger & Walmart
Walmart, which generates more than half of its revenue from groceries, has been battling Amazon for consumers’ dollars in a fight that has weighed on its margins.
Kroger, with nearly 2,800 stores, is the largest grocery chain in the U.S. It increased its stake in the online grocer Ocado and bought the meal-kit company Home Chef, a pair of deals that cost about $450 million. Ocado is known for automated warehouses that can quickly fill delivery orders, while grocers are increasingly looking to boxes of prepackaged ingredients to draw shoppers. It’s key for brick-and-mortar chains to give consumers a reason to shop in-store.
Walmart, meanwhile, is expanding curbside pickup and same-day delivery service. The retailer has spent billions responding to the Whole Foods deal, a clear indication that competitors want to protect their grocery turf from the Amazon onslaught, according to Jennifer Bartashus, an analyst at Bloomberg Intelligence.
“It was a good wake-up call,” she said.
Aldi & Lidl
Before Amazon bought Whole Foods, the biggest story in grocery was Lidl’s U.S. expansion. The company opened its first 10 U.S. stores last June, a day before Amazon’s announcement. The discounter, a longtime rival of Aldi in Europe, grabbed market share when it opened in the U.K., and many observers expected the company to shake up the U.S. industry.
So far, it’s been a mixed bag. Lidl, No. 82 in the Internet Retailer 2018 Europe 500, has scaled back expansion plans and abandoned some real estate sites. Still, studies have shown that its presence has forced competitors to cut their prices. And that’s exactly the effect predicted by analysts.
“As soon as they open a store everybody in that area drops their prices,” said Mikey Vu, a grocery expert at Bain & Co.
Aldi continues to expand, renovate stores and add organic items as it tries to move beyond its image as a no-frills discounter. Earnest Research found that Aldi, with about 1,800 stores in the U.S., is a top destination for so-called “churned customers” from Whole Foods, meaning shoppers who stopped visiting the organic chain.
The rising popularity of the discounters is having a cascading effect: Walmart cuts prices to eliminate the gap with Aldi and Lidl, and Kroger and other are forced to respond to keep their customers.
The competitive pressure in the industry has started to claim victims. It’s one thing for Kroger and Walmart to battle with Amazon, but weaker, regional chains are struggling to keep up. Southeastern Grocers, owner of the Winn-Dixie and Bi-Lo chains, emerged from a two-month-long bankruptcy last month. Tops Friendly Markets, based in Williamsville, New York, filed for Chapter 11 protection from creditors in February. The Fresh Market, an upscale chain owned by Apollo Global Management, has also been under pressure to fend off rivals.
Despite the press releases, media hype and the stock plunges they prompted, Amazon and Whole Foods control a tiny slice of the $800 billion grocery market. Only an estimated 2% of groceries in the U.S. are bought online. The question isn’t if, but when that will start to change.
Amazon has been expanding two-hour delivery from Whole Foods stores and it recently began offering grocery discounts for its more than 100 million Prime members, a move that could give momentum to online grocery sales. Still, many customers remain loyal to local grocers like Wegmans, HEB and Publix, and to shopping at stores where they can touch avocados and peer into the meat case.
For now, a wholesale shift away from brick-and-mortar stores doesn’t appear imminent. Not to mention that delivering food to customers’ homes—what the industry calls the “last mile”—remains expensive for retailers.