Whole Foods deals rattle the grocery industry
Amazon, Kroger bids for niche retailer could signal changes in technology and services for all.
Amazon announced last week that it had reached an agreement to acquire Whole Foods for $13.7 billion. The deal would allow Whole Foods CEO John Mackey to remain at the helm of the supermarket chain when the deal is expected to close later this year.
Since the Amazon agreement was announced, however, other potential deals have emerged, including one involving grocery giant Kroger. At the time of the announcement, Barclays gave an Amazon/Whole Foods deal a 60 percent chance of working out, with the remaining 40 percent hinging on other bids.
Regardless of who ends up acquiring Whole Foods, the pending deal is sending seismic messages throughout the grocery industry, said Patricia Huddleston, a retail professor at Michigan State University who specializes in consumer behavior.
“It really is an earthquake in the grocery industry,” Huddleston said. “But first, we have to see if the sale actually goes through; it’s not a done deal yet. In any event, I don’t think we’ll see an immediate impact on local stores.”
Huddleston said it would be at least a few years before the effects of the deal are truly felt as the companies work out their business.
“It’ll be a couple years, but Amazon definitely ups the ante in use of technology,” she said. “Right now, it’s a wait and see to see how the stores work and what they implement. Competitors would be wise to sharpen up their product mix, and if they’re not offering some sort of delivery service, they might want to investigate that.”
Should the Amazon/Whole Foods deal be approved, it would be the second-largest grocery transaction ever, trailing the $17.4-billion deal when Cerberus Capital Management, CVS Health Corp and SUPERVALU bought Albertsons in 2006, according to Mergermarket.
Whole Foods offers 430 stores and multiple distribution centers, which could provide a broader network for Amazon, and not just for delivery, Huddleston said. She said this also is a big play for general merchandise retailing and provides brick-and-mortar test sites for Amazon.
Mergermarket also suggests the deal hints at a cloudy future for brick-and-mortar grocery chains, with e-commerce strategies becoming a major focus for chains such as Walmart and Target.
While West Michigan retailer Meijer has committed more than $375 million to seven new stores and 22 remodel projects, the grocer also has made its presence known in the e-commerce and grocery delivery sectors through a partnership with Shipt that is rolling out across the Midwest this year.
Shipt memberships are $99 annually with orders of more than $35 receiving free delivery.
“We are excited to expand our relationship with Shipt, because together, we can offer customers across the Midwest a whole new level of convenience, product variety and service not available before,” Meijer President and CEO Rick Keyes said at the time of the delivery service launch for the Lake Michigan lakeshore in May.
Meijer also has offered online-to-curbside pickup programs since 2015.
Meijer representatives declined to comment for a story related to how an Amazon-Whole Foods deal would alter the grocery industry.
A key for success in delivery will be a wide portfolio of offerings, Huddleston said, and through Shipt, Meijer has more than 55,000 products available.
The other West Michigan grocery giant, Byron Center-based SpartanNash, also is exploring technological advancements in groceries.
SpartanNash stores include Family Fare Supermarkets, D&W Fresh Markets and Forest Hills Foods.
SpartanNash announced the pilot program of an online shopping service this spring.
Calls to SpartanNash representatives for this story were not returned.
Grocery delivery is a growing segment, at about an 8.5 percent per year clip, Huddleston said, as certain demographics continue to seek increasing convenience in life.
There is, however, a finite cap on the delivery growth, as a portion of the population always will prefer shopping in stores.
“It’s hefty growth, but there’s a tipping point,” Huddleston said. “When I shop, I want to touch and see the food. That’s a significant barrier for a lot of consumers.”
Where grocery chains with brick-and-mortar stores could compete is in fresh prepared food, Huddleston said. Whole Foods locations currently have selections of ready-to-eat food, soup and salad bars, she said. A move to more online retailing practices leaves the competition wide open.
“Even if you have fast delivery, the freshness of prepared foods won’t be acceptable,” she said.
SpartanNash has begun remodeling its stores with an added focus on pre-prepared foods and a wider selection of items a consumer might find at Whole Foods, exemplified by remodels of D&Ws at Breton Village Mall and in Grand Haven.
Huddleston said Amazon might try to decrease Whole Foods prices, which could be a risky move.
“Whole Foods has a loyal following as a niche retailer,” she said. “If I’m (Amazon CEO) Jeff Bezos, I’d be careful tinkering with that too much. We already have Walmart and Target, but there’s an opportunity for niche retailers to be successful.”
As a niche retailer, Whole Foods already attracts a market that Amazon targets, as a majority of Amazon Prime members make more than $100,000 a year, said Chuck Grom, an analyst from Gordon Haskett.
“The acquisition gives CEO Jeff Bezos a weapon to attract a customer he largely already caters to, but if the goal is to fully compete against Walmart, then could Dollar General be next on Amazon’s buying list to go after an arguably larger part of the U.S. population?” Grom said.