Five potential impacts of the Amazon-Whole Foods deal
Amazon’s surprise acquisition of Whole Foods announced Friday could have wide-ranging implications for the grocery industry and its players that go beyond whatever benefits the merging companies find in one another.
Reaction to the deal on Wall Street was murder on some public grocery stocks like Kroger (down more than 10%), Smart & Final (down 16%), Supervalu (down 13%), United Natural Foods (down 8%), Sprouts Farmers Markets (down 8%) and Wal-Mart Stores (down 5%). Though some analysts said the immediate reaction was out of proportion to the effect of the deal, there’s little doubt some ripples could be felt, but they might not necessarily be bad ones.
The following are five entities that could feel some effects:
Whole Foods is among Instacart’s most significant food retailers, realizing sales through the service in excess of $200 million in 2016, which helps the service scale cost-effective delivery across dozens of other grocers and retailers that also participate in the service. Were Amazon to pull out in favor of its own delivery solution it could raise costs for Instacart and, potentially, for those brick-and-mortar grocers who have trusted their e-commerce strategy to it, including Publix, HEB, Costco, Smart & Final and others.
One source suggested a higher possibility that Instacart could be next to be sold to Amazon, although that would be an ironic finish for a company that has made a business on preparing brick-and-mortar stores for Amazon’s arrival. For now, customers can still shop Whole Foods on Instacart, and sources said they have a contract to do so for another four years. In the meantime, Instacart would do well to continue adding new clients such as recently announced partnerships with Stop & Shop, Wegmans, Publix and Homeland Stores.
RBC analyst Bill Kirk said Whole Foods’ valuation in the deal validates the trading level of Sprouts, Whole Foods’ price-focused, small-store competitor, which for the past few years has outperformed its larger rival in terms of comps, traffic, customer perception and unit expansion opportunities. Sprouts also has announced plans to more than double a current 10-store e-commerce business through a partnership with Amazon Prime Now.
Does this now go away or does it make Sprouts that much more attractive to Amazon? Kirk believes there would be no major antitrust issue were Amazon to bolt Sprouts on and attack the natural foods business through Whole Foods’ upmarket traditional stores and the price-friendly Sprouts banner. As a bonus, it could save Whole Foods from spending on the 365 format, its own small format that’s more directly competitive with Sprouts. Amazon, though may not be the only bidder for Sprouts, which earlier this year reportedly drew acquisition in interest from Albertsons Cos. “We think today’s news 100% puts Sprouts into play, with Wal-Mart and Kroger potential bidders,” said Gordon Haskett analyst Chuck Grom.
United Natural Foods
As Whole Foods’ primary supplier, UNFI has traditionally risen and fallen with the fortunes of its highest-profile customer – including this spring when its engagement was a topic of Jana Partners’ grievances with Whole Foods and subsequent collateral damage. Amazon may be a newcomer to brick-and-mortar grocery but logistics and delivery are well within its capabilities.
Amazon’s move could be seen as a defensive play and an acknowledgment that Walmart is on to something with the integration of physical and digital assets leading to its market-beating sales results in recent years. Grocery, which generates frequent and habit-forming trips, has been central to Walmart’s strategy, visible in offerings like grocery pickup and experiments in potentially more cost-effective delivery strategies utilizing stores as distribution points. If it wasn’t already abundantly clear, Amazon and Walmart are gunning for one another, with this providing even more evidence.
Once big retailers like Costco and Kroger caught on to the fact that the natural foods trend pioneered by Whole Foods had legs, it was only a matter of time before their investments behind the trend narrowed the perception gap between them, and their superior pricing muscle took it mainstream. Since then Whole Foods has been something of an ally to Kroger and Costco by providing an example of higher prices for similar items. To the extent Amazon’s buying power can help to bring pricing down, that could re-introduce pressure on its mainstream interlopers.