Bahige El-Rayes is a principal in the retail practice of A.T. Kearney, a global strategy and management consulting firm. He's also co-author of the M&A report, Off to New Peaks in Uncertain Times.
With its move to acquire Whole Foods, Amazon is putting new life and meaning into the concept of omnichannel, showing once again that they are serious about owning every access point to the consumer, whether through Echo, Dash, Prime, or in this case, brick and mortar. Whole Foods’ acquisition would allow Amazon to add more than 460 new physical locations to their distribution network and bring them even closer to the customer.
For the rest of the food industry, we expect to see two main categories of winners emerging. First, those who are investing in e-commerce, such as the Amazons and Walmarts; and secondly, the deep discounters, like Lidl and Aldi. This leaves everyone else under pressure, including traditional groceries and small online players.
The deal makes perfect sense. For years, Whole Foods has been a potential acquisition target and they reached a point where their growth was saturated, beleaguered by intensifying competition in organic.
It didn’t make sense for traditional retailers to buy them because strategic acquirers at that time were focused on fending off discounters and developing their online presence. With the online channel showing tremendous growth and looking for more opportunities, this Amazon acquisition looks like a very logical move.
With discount grocery retailers like Aldi, and in the future Lidl, expected to gain ground and potentially decrease the profit pool of traditional retailers, Amazon’s acquisition of Whole Foods also stands to change the balance on the other end of the customer spectrum. Amazon will become an even more formidable player in food retail, accelerating the path they are already on.
They are likely to move quickly to leverage strengths in digital engagement, understanding of consumers and the customer experience, and operational excellence to significantly improve both the experience and price point at Whole Foods.
Good for Amazon. Good for Whole Foods. But it’s a huge disrupter for the grocery sector on both ends of the market. To those, we say first, double down on e-commerce. Secondly, double down on fresh, the fastest growing segment of the grocery store. Thirdly, focus on click and collect. These are all ways to protect margin.
The grocery sector is massive, with $800 billion in annual sales, so we’re not suggesting it’s the death of everyone caught in the middle. But it’s a sector that’s ripe for disruption.
Although traditional grocery retailers are in a tough spot, they have a unique set of skills that Amazon has yet to acquire. Traditional grocers have established supply chains, relationships with suppliers and farmers— and that’s their advantage. After years of building these assets, they can quickly scale things up in a cost-efficient way. What they still need to do is:
- Accelerate efforts to develop a shopping experience that integrates the physical and digital worlds – current timelines are too slow. They will need technology to enable faster growth, whether through click-and-collect, buy online, pick up in-store, or home delivery.
- As a differentiator, increase private label offerings that cannot be found outside of a specific grocer.
- Double down on fresh and deepen relationships with players across the value chain
- Step-up efforts to reduce costs to enable investments in price, digital offering and in-store experience.
The traditional grocers’ response to date has been somewhere between staying put with what they already do better than Amazon and working at expanding their shopping experiences. But they will also need to step up quality to compete effectively.
To an extent, this is already happening with natural and organic, particularly in produce, and “free-from” offerings that have gone mainstream and become much less expensive over the last five or so years. It likely to accelerate and extend in meat and seafood where less progress has been made by conventional players.
U.S. food retail is likely to remain fragmented overall as the battle for share of stomach only intensifies. That said, the U.S. food industry has been consolidating and is likely to continue doing so – witness the Ahold-Delhaize, Albertsons-Safeway, and Kroger-Harris Teeter deals of the last few years, just to name a few. In our recent study on Consumer and Retail M&A, Off to New Peaks in Uncertain Times, we predicted that retailers—and in this case grocers—will be bullish on M&A this year in order to achieve growth.
The Amazon-Whole Foods deal, which initially sent major grocery stocks plummeting, will certainly have major traditional grocers thinking about consolidation and creating synergies to answer the digital giant.
