Are Supermarkets in Trouble Now that Amazon is in The Food Industry?

Tuesday 4 July 2017

Article by Brittany Arnett

Yet again, Amazon has carved its path to trail blaze into yet another industry – the food industry – and it only cost them one small fee: US $13.7 billion ($18.1 billion).

 

For US $42 a share, Amazon recently purchased Whole Foods , gaining control of 431 store fronts in the process. Following the purchase, both Amazon and Wholesupermarkets Foods stock prices increased, while other large retail supermarket chains’ stock prices plummeted. Kroger, the United States’ second-largest general retailer behind Walmart, experienced a 28% drop in stock prices, with more minor drops in stock for Walmart, Target, Publix, and other major food retailers.

But, this is not the first time Amazon has tried to enter the food sector. Amazon already offers “AmazonFresh,” a grocery-delivery service available in select cities to its Prime members, along with a meal-kit delivery service via Martha Stewart and Marley Spoon, called “Martha & Marley.” Amazon has even created cashier-less stop-and-go food stores for its employees, with hopes to open them up to the public one day. So why the uproar at this additional venture in the food industry?


Although Amazon has attempted to enter the food sector numerous times before, rarely, if ever, was it truly successful. Whole Foods, on the other hand, had pioneered fresh, organic food retail in a bricks-and-mortar fashion, which gives Amazon a solid platform to jump off of when experimenting within the industry. Now, Amazon has hundreds of stores across the United States, all in relatively affluent neighbourhoods primarily composed of the millennial generation. And millennials love Amazon.

On announcement of the merger, Whole Foods commented that it will continue to operate under the Whole Foods brand, that its headquarters will remain in Austin, TX, and that John Mackey will continue to hold the position of CEO. But this does not mean Amazon will not take the advantage to grow the grocery chain further. Amazon’s value and ease has revolutionised the way consumers purchase goods – whether those goods be books, electronics, appliances, cleaning supplies, clothing, utensils, office supplies – you name it, and it is very likely that Amazon has it and can ship it to you for free in three days or less.

So what does this mean for the food industry as a whole? It is tough to say exactly, but there are many speculations. For starters, Amazon can expand its AmazonFresh delivery service substantially, offering more variety, organic produce, and in more cities than before. And because Amazon already has a stake in meal-kit delivery, a service that provides customers with all the necessary ingredients and recipes to cook their own food at home, it is possible that other services like Blue Apron and HelloFresh are in danger.supermarkets

Furthermore, large retail supermarkets will have to watch out for this merger, especially if Amazon cuts Whole Foods’ high prices. How would this affect Australian supermarkets? Again, that is tough to say, but large food retailers such as Coles are definitely not slowing down anytime soon.

Coles, an Australian supermarket chain owned by Wesfarmers, accounts for the vast majority of the Australian retail food market and employs more than 100,000 individuals. Its stores and online platform serve more than 21 million customers on average per week, and operate more than 2,400 retail outlets nationally. The sheer size of food retailers like Coles, and the particularity of the Australian food retail market focusing mainly on in-store purchases rather than online purchases, makes it unlikely that the Amazon-Whole Foods deal will cause a major threat to food retailers across the nation.

As Coles already operates through online stores, it is questionable if a new online food service with bricks-and-mortar stores based in the US will alter the landscape of online food retail in Australia much. Coles’ duo-store fronts, both online and bricks-and-mortar, cover all the bases when it comes to grocery shopping. And despite several online grocery outlets, the vast majority of Australians continue to purchase their groceries in stores rather than online.

In fact, recent estimates say that ASX-listed retailers only make up 5% of their sales online, well below the global average of 11%. For Coles in particular, online sales only make up 2% of total sales. It is unsure whether these low figures indicate how online grocery shopping is an unpopular option in Australia, or if Coles needs to improve its online grocery experience to boost customers. If it is the former, then Amazon implementing an online grocery delivery service will likely result in a failure; if it is the latter, then Coles will need to revamp its online presence before Amazon has the chance to take over.

But many question if and when Amazon opens in Australia (projected to occur as early as next year), if online grocery will get a run for its money. These speculations are overblown though – it is highly unlikely that Amazon will jump right into fresh food delivery once it starts here.

For now, it is best to keep a watchful eye on Amazon’s plans, because no one knows what the online retail giant will be up to next. If the company does open up an online food retail service, then large food retailers such as Coles may get a run for their money. It is also worthwhile to keep watch on the nature of online grocery shopping in Australia, to see if it will increase over the coming years, particularly as the nation’s cities become more densely populated.

AmCham is providing the opportunity to hear about the fate of the Australian food market with its event on July 27 in New South Wales. The event features John Durkan, Managing Director of the Coles Group. Mr. Durkan will be discussing the state of the Australian Retail Market in this business briefing.

To find out more about the event, or to book today, please click here. 

 
Brittany Arnett is currently interning at AmCham in Sydney.

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