Amazon buy-out of Whole Foods a ‘wake-up’ for retailers

Amazon’s acquisition of organic food store company Whole Foods for $13.7 billion (£10.7 billion) is likely to take it head-to-head with the major retailers in the US and UK, market analysts have warned.

In the deal, announced on Friday, the online giant, will take on around 450 stores across the US and Canada and 9 in the UK, which are set to remain under the Whole Foods brand. Amazon had previously signalled its intent in grocery with its Amazon Fresh proposition and a UK tie-in with Morrisons, and offers a one-hour delivery service with a number of US independent wine retailers, and was already trialling a revolutionary new ‘grab and go’ bricks and mortar grocery store for food and alcohol in Seattle, although it has yet to open the to the public.

Currently Whole Foods offers wine in around 250 of its US stores, and all of its UK sites, with around 85 of the sites across the countries also operating a wine bar, serving wine on tap.

Market analysts have called it a ‘wake-up” call for the grocery industry, pointing out how serious the online giant is about cracking the food and wine market, while also pointing to the strength of bricks and mortar to make a more attractive omni-channel offer.

Harsha Wickremasinghe, associate at merger and acquisitions and and debt advisory firm Livingstone said it was the “clearest indication” yet that Amazon intends to be a serious player in grocery retail. “And is a significant wake-up call for grocery retailers in the North America and the UK,” he said.

Wickremasinghe added that the move would give Amazon a key advantage in the London market, where seven of WholeFoods’s UK shops are based.

“It is widely known that Amazon has been scouting for prime-Central London locations as part of its move into grocery retail in the UK.  Exactly 12 months since the launch of Amazon Fresh in the UK,  and in one fell-swoop, the online giant will now have nine supermarkets in the UK – seven of which are London-based.”

Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel said it was also recognition that retailing food and drink online as a pure online player was a difficult proposition.

“Online grocery shopping has grown rapidly and may seem quite well established, but it is still a fairly niche option for food shopping,” he said. “Only just over a quarter of the UK population shopped online for groceries during the past year, and many consumers still don’t do so regularly.”

“A business like Whole Foods brings with it many of the crucial ingredients the e-commerce giant has been missing in its other forays into food and drink. The power of a physical presence on the high street to grow a brand’s reputation and credibility is particularly important in grocery, where consumers want to be able to see the quality of the items they’re buying first hand,” he said.

Rob Wade, consumer insight director at Europanel said this had been highlighted by the inability of Ocado to return a profit and it raised interesting questions about Amazon’s innovation and expansion plans.

“Whatever their plans in the online FMCG arena, Amazon will have the reality that Ocado did not turn a profit for the first 15 years of operation ringing in its ears – this is not an easy market, and time will tell how Amazon will fare,” he said.

He pointed out that although ecommerce represented significant opportunities, it was still in its infancy and there was an issue in getting consumers to buy into the idea.

“With the exception of South Korea, the UK, France and China, no other market has bridged the 1% market share threshold for online grocery shopping,” he pointed out. “It looks like Amazon sees a presence on the high street via Whole Foods as the way to change that.”

Clive Black, said there was “no doubt that a material new ingredient has been thrown into the global grocery sector M&A melting pot”, but given the size of Whole Foods in the UK, the effect for now in the UK would be “negligible”.

However, due to the size of Whole Food’s US operation, this posed more of a threat to the US market.

Hugh Fletcher, Global Head of Consultancy and Innovation at ecommerce consultancy firm Salmon argued that the move would position Amazon to thrive and was “designed to successfully beat competitors to the punch in grocery.”

“This deal is a clear signal of intent from Amazon to dive deeper into the grocery sector. Amazon Fresh and Amazon Go were the first steps, but this shows the ecommerce player is no longer treating grocery as just another branch in its huge eco-system,” he said. “The partnership also presents an opportunity to maximise Whole Food’s vast market share in the US and will no doubt enable it to digitally transform into the future.”