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When Amazon announced last week that it was buying US upmarket grocery chain Whole Foods in a deal worth nearly $14bn, it sent shockwaves across traditional grocers.
Considering how Amazon changed our habits around how we buy books, it could change how we buy our chicken, porridge or Kerrygold butter in the future.
This move certainly took investors in traditional bricks-and-mortar grocers like Walmart, Target and Kroger by surprise. For example, at one stage, shares in Kroger were down almost 28%.
Interestingly, 30 years ago neither Amazon nor Whole Foods existed and they have really come of age in the last 10 years.
Whole Foods was founded based on organic food principles that appealed to the new movement of young healt- consious consumers in the US. Over time, it has grown, winning over millions of customers to its vision on healthy nutrition and sustainable food.
While it expanded by conquering new locations across America, in more recent years, growth has slowed and the share price has halved since 2013.
Whole Foods had earned the title “Whole Foods, whole paycheck” among consumers in the US because of its prices. It has come under pressure from competition such as Trader Joe’s and even Walmart, which have moved into their traditional natural and organic space with similar offerings but at much lower prices.
Lower prices
The question for food companies and farmers is: will this transaction change the landscape of how consumers buy their food in the future?
This deal is very interesting on many levels.
Firstly, Whole Foods changed an entire industry, to one where it was all about physical experiences, the colour and smell of the produce, the cultural diversity of its employees and its high prices for that experience.
Amazon, on the other hand, is about convenience, immediacy, one-click ordering and competitive prices.
Amazon has been trying to get into the grocery game for a while now. It is already testing stores that allow customers to walk out without the hassle of going to a check-out.
The deal also confirms what organic and other natural food sales trends have been showing us for years – organic and sustainable food is on the money now.
But as more American grocery consumers are buying organic products, the race has begun among grocery retailers to offer low-cost organic and natural produce.
We shouldn’t be surprised that this deal could put further pressue on grocery stores to lower prices. It’s likely that Whole Foods will drop its notoriously high prices.
By joining forces, this deal looks set to bring natural and organic food directly to more Americans than ever, at prices that could be more competitive with conventional foods.
This will challenge the premiums achieved for organic food and will question the viability of organic production at farm level.
Whether this happens or not remains to be seen, but it is highly unlikely, given Amazon’s model, that food prices will increase under this deal.
Online grocery sales
Currently, just over 3% of grocery sales in the US come from online, which is lower than the 8% share of overall retail. That’s going to change even more rapidly with Amazon in the market.
But this move won’t just change Amazon and Whole Foods. It will also play a role in shaping the future of traditional supermarkets. While traditional bricks-and-mortar supermarkets make the move to online, this deal is the opposite, in that Amazon, which already has an online food arm (Amazon Fresh), is now moving into the traditional space.
What it does signal is that grocery retail is moving to become a hybrid approach of online and in-store. This may mean we will see more shopping online with in-store pickup along with online grocery delivery services in the future.
It will be interesting to see what it means for food brands. Traditional food brands may be challenged, but it may provide an opportunity for start-up food companies and challenger brands.
Whole Foods has built a great brand standing for high-quality, fresh, healthy and natural food. Amazon is a brand that people trust. However, it’s not a discount model – it sells quality with minimal hassle. And this may be where this deal sits.
Tapping into millenials
This deal may be about tapping into millenials – the future generation. These are tech savy, health consious and value ethical natural food production, but still want value.
How many of these young people really want to spend time grocery shopping? How many of these will own cars in the future? And will they buy their food much the same way as they buy books, music or holidays?
But much like the newspaper/media industry, nobody should be surprised that the future of food retailing is moving toward a fusion of digital and physical experiences.
What is interesting is that Amazon obviously now sees the benefit or need in having physical stores. Traditional retailers should be worried. They have been too slow, with only 8% of US retail sales being online, to move online, for fear of cannibalizing higher margin store sales. Now they must react, which will further drive competition.
So will I be buying my food from a Tesco or an Amazon in the future? With this move, it’s beginning to look more like the latter, which should worry traditional supermarkets, food companies and farmers alike, as Tesco is currently the largest buyer of Irish food in the world.
Agribusiness Report 2017: disrupting the supermarket aisle
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