Amazon sinks teeth into supermarkets

Whole Foods, then a whole industry? Amazon sinks teeth into supermarkets

Jeff Bezos’s purchase of the organic food chain is a clear sign that the UK’s big grocers will soon be in the fight of their lives
Jeff Bezos’s retail behemoth is a monster challenge for traditional supermarkets.
Jeff Bezos’s retail behemoth is a monster challenge for traditional supermarkets. Illustration: David Simonds/Observer

Now the UK supermarkets know Amazon is coming – probably. The biggest and most frightening beast in the retail jungle has signalled it is serious about the grocery business. Jeff Bezos’s monster is making its largest ever acquisition by paying $13.7bn (£10.7bn) to buy Whole Foods Market in the US.

The only mild consolation is that the main action is taking place on the other side of the Atlantic and that Whole Foods’ store portfolio in the UK runs to only nine outlets. But, on the generally reliable principle that global domination of a market is usually Bezos’s goal, UK supermarkets will fear a proper scrap once Amazon has overhauled Whole Foods.

The stock market’s reaction was extraordinary. In the US, Walmart’s valuation fell by almost as much as the sum Amazon is paying to acquire Whole Foods. In the UK, Tesco was down 5% and Sainsbury’s 4%. Morrisons rose 1%, presumably because it already has a supply agreement with Amazon in the UK and thus could become a takeover target if the US giant also wants to buy a UK chain.

Therein lies the most intriguing element of the deal: Amazon, the online revolutionary, feels the need to own shops to be big in groceries. It is the reason why UK supermarkets should not conclude that their business models are broken. Amazon is proposing an approach that looks like their own: a mix of online and physical stores.

Traditional retailers have always argued that pure online shoppers don’t really exist. Punters are happy to mix and match and use top-up shops between big deliveries, which is one reason why the country is awash with Tesco Metros and Sainsbury’s Locals. The strategy, therefore, is to catch both online and offline baskets. It would seem Amazon agrees.

Yet a semi-endorsement of a business model is no comfort if Amazon gets properly serious about food in the UK. The US giant has two advantages: it understands logistics, and its shareholders don’t expect it to make hard profits to be paid as dividends.

On the logistics front, Tesco et al are no slouches. One-hour delivery slots are the norm and Ocado, just by being a pioneer, has forced everyone to raise their game. Distributing fruit, vegetables and chilled products via your own vans is also harder than dispatching a book via a third-party courier. Amazon wouldn’t hold all the aces, though you’d bet on it to find a fistful in the end.

But the second factor – the lack of pressure to make bottom-line profits – cannot be matched. Amazon generates enormous cashflows but its investors are happy to see those returns ploughed into new markets. That has been Bezos’s true brilliance: he has corralled supportive long-term investors who have accepted the explicit bargain that Amazon’s mission is to acquire revenues first and worry about dividends later. That is what makes it such a formidable competitor. Its investors will be happy as long as the share price is rising – and it is.

UK supermarkets’ response will now become a priority concern for their own shareholders. These businesses are not defenceless: they have loyal customers, big buying power and will not be blown away. Indeed, Sainsbury’s purchase of Argos last year already looks a smart effort to get ahead of the game. But investors also know that Aldi and Lidl destroyed profit margins in the sector, slowly but steadily. An Amazonian attack – when it arrives – threatens to be similarly relentless

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