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A week ago, Amazon made a bid of $42 a share for US grocer Whole Foods. So excited was the response that the latter’s share price rose to $48, while those of leading bricks and mortar supermarkets and general retailers in the US tanked. Down went Wal-Mart, Target and Kroger share prices. And the same thing happened in the UK with Tesco and Sainsbury losing close on 5% and 4% respectively in value*.
Although the deal is yet to be signed (and a competitive bid is possible), the implications for the grocery trade are huge. Everything could change. On entering a market, Amazon specialises in total category disruption. Take books, consumer electronics and the Cloud for example. progressive market domination follows and that market is changed forever. But those were sectors that are perfect for tech-based e.com service. What about food? Well, it’s worth looking beyond the USA – Amazon tends to take a global perspective after all.
Although the online share of grocery in the USA is still only around 3%, in the UK it stands at 5% and is growing at over 17% (source: ONS April 2017). In fact online grocery is now the fastest growing ecommerce sector in the UK. And double-digit growth in Europe is forecast to continue.
Amazon has wanted to penetrate the grocery business for years. The launch of Amazon Fresh ten years ago signalled the first step. And that hasn’t proved easy. So, has getting into bricks and mortar become an ambition for this mighty megalith? Let’s consider the reasons why:
The grocery market is huge. Everywhere. But, people still like to see and feel the fresh food they’re buying, so they still make their trips to the store. This is one of the reasons Amazon Fresh has taken longer to lift off – even among busy, affluent urbanites. The closest traditional grocer to the Amazon Fresh proposition in the USA is Whole Foods. And it does this in the right territories and to the right audience.
Whole Foods own about 450 stores, mainly located in metropolitan areas such as New York, Los Angeles, San Francisco, Seattle, Boston and Philadelphia. And their target audience are busy, affluent professional millennials. Just like Amazon Fresh and the customers of Amazon Prime. So, customers of Amazon and Whole Foods have a lot in common.
Add to this the gain in distribution outlets which owning stores across these territories could give other Amazon categories.
And there’s another reason too. Amazon isn’t like companies in the supermarket business. Unlike the big supermarket chains in the USA and the UK, it doesn’t much concern itself on dividend payments to shareholders or in building huge cash reserves. It operates on a very different model. And, as in everything it does, Amazon has the will, ability and muscle to disrupt the grocery game to its own ends. Already trading on slim margins, the major supermarket chains in the US and further afield have little room for manoeuvre.
And this is what is scaring a lot of top players in the grocery trade right now.
Tony Wightman is Director of Wellwood Consulting
* (Source: MarketWatch).