Amazon is running through retail markets like a steamroller. The online shopping giant is bankrupting traditional retailers like Sears, Target, JC Penny, and even Walmart. More recently, it set its sights on the retail grocery industry, purchasing Whole Foods for $13.7 billion. The Amazon Whole Foods deal will have big implications for the grocery industry.
First of all, Amazon Whole Foods is a clash of civilizations. Amazon specializes in undercutting the competition with low prices. Whole Foods does the opposite. Nicknamed “Whole Paycheck”, the grocery chain specializes in selling upscale items to high-income customers.
Customers shop at Whole Foods because they can afford to shop there. Full stop.
Does Amazon plan to ditch Whole Foods’ traditional business model and compete on price with high-volume grocery chains like Walmart, Kroger, Target, and Costco? It certainly looks like it.
On August 28, its first day as owner of Whole Foods, Amazon slashed a number of prices: Bananas were cut by 38% per pound; ground beef, rotisserie chickens, and avocados by 29% per pound; and apples by 43% per pound. “Whole Paycheck”? Not anymore.
According to Mark Baum, vice president of the Food Marketing Institute, the price cuts are just the beginning:
“Price was the largest barrier to Whole Foods’ customers. Amazon has demonstrated that it is willing to invest to dominate the categories that it decides to compete in. Food retailers of all sizes need to look really hard at their pricing strategies, and maybe find some funding sources to build a war chest.”
Amazon will use strategic pricing: Identifying specific areas where it can compete on cost, and making the money back on specialty items like organic frozen foods and vegan dry goods.
How are Stock Markets Reacting to the Amazon Whole Foods Deal?
Traditional grocers have performed poorly of late. The Kroger Co. (KR) has lost 48% on the NYSE over the past 12 months. It fell by 8% on August 24, the day Amazon announced it would lower prices at Whole Foods. However, Kroger is still a highly-profitable company that’s known for rewarding its investors.
Sprouts Farmers Market Inc. (SFM), an upscale retailer that competes directly with Whole Foods in many neighborhoods, hasn’t responded well to the price cuts. Its stock price fell by 20% from August 24 to August 28.
The Target Corporation (TGT) is getting hit with a double-whammy. First, its clothing and household goods departments are struggling to compete with Amazon’s online sales. Now, its grocery business could be in danger, too. Target’s stock price has fallen by 29% over the past 12 months.
Wal-Mart Stores Inc. (WMT) has actually gained 9% over the past 12 months, although it fell by .8% on August 24.
What Does It Mean for Your Investments?
Amazon seems unstoppable. Once the dust settles from the Amazon Whole Foods deal, the grocery industry is going to look vastly different. Some of the traditional giants will have to downsize or go bankrupt.
On the other hand, the grocery business is too big and too localized to be dominated by one company. Amazon will continue to grow, but some new players are likely to emerge, too.
If you can afford to invest in Amazon—its stock price is $946—by all means do so. If not, at least hedge your bets by getting out of poor-performing traditional grocery chains.
Approach the grocery market with caution. According to Karen Short, an analyst at Barclays Capital, the Amazon Whole Foods deal is just the beginning of a bigger trend:
““The conventional supermarket has not evolved much in decades. But Amazon will likely drive drastically different shopping behavior in grocery. The survival of the fittest has begun.”