What Amazon’s Whole Foods buy means for Aussie retailers
Probably the biggest story of late was Amazon’s announcement that it would acquire the high-end grocery chain, Whole Foods, for US$13.7bn. The purchase is a significant step-up in Amazon’s assault on traditional grocery retailers. With the U.S. behemoth about to set foot on our shores, should Coles and Woolworths be even more alarmed?
This was a very interesting move by a company that has thrived by attacking traditional retailer margin structures with its online platform and sophisticated logistics infrastructure.
Amazon launched its US grocery offering, Amazon Fresh, in 2007. Morgan Stanley estimates that it has captured around 3% of the national market over the last 10 years. Amazon has also been trialling smaller format stores with new technology that eliminates the needs for cash registers. The concept is shown here.
This latest move represents a major step change in Amazon’s channel strategy.
Whole Foods is a US chain of 461 grocery supermarkets (440 in the US, 12 in Canada and 9 in the UK), focusing on organic and natural products. The target customer is more affluent and quality focused than price-driven.
The acquisition provides Amazon with a solution for consumers who prefer personal customer service and the ability to select their own produce. It also allows Amazon to offer a click and collect option for customers. The store network adds incremental points of distribution and inventory to facilitate Amazon’s Prime Now product, cutting delivery times. When integrated with Alexa, the need for large basket shopping could be eliminated for many consumers. The addition of the Whole Foods brand provides added credibility to the Amazon Fresh product offering.
Amazon is also likely to cut the price of organic products to make them more accessible to a larger consumer base, while funding store upgrades.
In the Australian market, we have seen investors become increasingly nervous about the impending arrival of Amazon in the local market. This has seen the share prices of incumbent retailers in Amazon’s core categories of electronics and fashion negatively impacted over the last 6 to 9 months.
Amazon’s acquisition of Whole Foods in the US increases the likelihood that the grocery market is on the list of targets when it launches in Australia. However, it also raises the possibility that it might look to acquire an existing operator in Australia to gain the same benefits that are expected to be delivered from the Whole Foods acquisition. An acquisition would also provide Amazon with a base of volume from which to build scale and reduce unit costs. High stock velocity is key to getting the economics of food retailing to work given the low margins in the industry.
However, this is unlikely to be one of the major supermarket operators given incumbency challenges. Alternatively, Amazon could look to bring Whole Foods stores to Australia. While Woolworths acquired a small organic produce chain in NSW last decade (Macro Wholefoods), it was never able to get the format to work, later rebranding stores are Thomas Dux and then closing them.
The upper end of the grocery market is still highly fragmented, with some small local chains existing. There could be an opportunity for a national brand focused on the more affluent or aspirational consumer to be developed similar to Waitrose in the UK or Whole Foods in the US.
With Coles’ and Woolworths’ economics under pressure from Aldi’s ability to capture volumes at the bottom/price conscious end of the market, a new competitor targeting the top end would compound the pressure on the scale economics of the major supermarket operators.
The Montgomery Global Fund and Montaka own shares in Amazon.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
David Howard
:
I believe the impact on Australia from Amazon is overstated. The success of Amazon can be traced back to their original model. Supply quickly and cheaply products that can be packaged and delivered where customers make single purchases and products are identical that were consumed over time. Prior to Amazon, customers used to buy books, DVD’s and other media at a specialist shop making a single (non-urgent) purchase consuming the product over time. Online purchase had greater range, was more convenient and often cheaper. Leaving aside the DVD and book sales that may be impacted by Amazon, who or what will be impacted?
Fresh food- Whilst they could potentially take over Metcash following the Whole Foods concept, the difficulty is that IGA stores who are the front end of Metcash are independent. Amazon could potentially allow the local IGA or Farmers Fresh on to their system but it is hard to see the partnership cincreasing market share. Coles and Woolworths with distribution points in every suburb and sophisticated (if sometimes clunky) on-line retail are likely to be able to meet and beat Amazon.
On electronics, in the US, Best Buy (their JB Hi Fi) has seen sales and profit growth. They simply price match on large items. They have found that people want to take home there PC rather than take a day off work and wait at home to sign for a delivery. Customers want to see their TV before buying and there is no logic in adding the step of going home and logging on to get the same item they can pay for at the counter.
Small electronics/batteries are said to be much cheaper through Amazon. For some who purchase in quantity, a 50% savings can be attractive but for most people, purchases are $20 at a time and so the savings per sale might be $10. Ask yourself, would you log on to buy some AA batteries even if they were cheaper or would you just pick them up at Coles. When your printer cable fails, would you log on to get the item next week or rush to JB and print straight away?
Finally, there is apparel. Here is where I think Amazon will have the edge over low end retailers and may well spell the end to struggling Target. It fits the original model that produced such success for Amazon. Plain T-shirts, hoodies, runners and the like are simple commodities. On-line can have a far greater range, less overhead than bricks and mortar and are not something consumers buy today and use tomorrow. It is easy to imagine providers like Bonds, King Gee, Bata, Midford and their no-name equivalents abandoning their own retail portals and using Amazon. Just as it is easy to see the consumer of cheaper clothing making all their purchases on-line.