This blog is based on the Packaged Facts report Whole Foods, Trader Joe’s, and Natural Channel Grocery Shopping: The Future of Food Retailing
In June 2017, the future of natural channel grocery shopping in the U.S.—and likely food shopping overall—changed when Amazon bought its way into brick-and-mortar with its purchase of Whole Foods. The events leading up to the Amazon/Whole Foods marriage were fast-paced and undercover, so to all but the few in the know the deal seemed to come out of the blue. In retrospect, the move is less surprising.
Competition from Kroger, Walmart Opened Door for Amazon’s Whole Foods Merger
At the time of the merger Whole Foods had posted seven consecutive quarters of negative comparable-store sales, reflecting a slow-down in average weekly sales per store, sales per square foot, and comparable store sales growth. There had also been a lag in new store openings, extending even to the rollout of the new fewer frills and lower-priced 365 format stores. While the likes of Whole Foods and Trader Joe’s were once almost unchallenged, today traditional and discount retailers including Kroger and Walmart are cutting into the business by offering a wide array of less expensive natural and organic fare. Some analysts say the turning point was when Walmart added organics in 2014, with prices 25% less than those at Whole Foods. Kroger dove in in September 2012, launching its more affordable and phenomenally successful Simple Truth natural and organic lines and surpassing Whole Foods in natural and organic food sales in 2017.
In the days and weeks following the Amazon/Whole Foods announcement, speculation was rampant as to how the integration of the No. 1 e-commerce merchant and the No. 1 pure-play natural foods retailer would play out, but some questions were soon answered. In late August, on the same day the deal received FTC approval, Amazon specified changes to be implemented immediately upon finalization of the merger, which took place a few days later, leaving no doubt that Amazon plans to integrate its online and delivery clout with Whole Foods’ brick-and-mortar network. Among the changes now in effect are in-store price slashing on a wide selection of groceries, the sale of Whole Foods and 365 brand products via Amazon.com, the sale of Amazon tech products including Echo and Echo Dot (Alexa) in Whole Foods, and allowing Amazon customers to pick up and return their online orders at Whole Foods. Amazon has a long history of sacrificing short-term profits to gain market share and traffic, and news of the additional price competition sent the grocery industry reeling, with Kroger shares falling 8%. “It’s going to be brutal,” said Scott Mushkin, an analyst for Wolfe Research. “The entire way we shop for consumables is going to change” (Bloomberg, August 24, 2017).
The Future of Amazon, Whole Foods, and the Natural Food Channel
Looking further ahead, this market watcher views the Amazon/Whole Foods marriage as marking the tipping point in a shift that is already underway, with the brick-and-mortar store of the future still alive and well but vastly different as a result of ever sophisticated mobile apps and new-generation brick-plus-click logistics including store remodels. In this vein, expect a trend already underway in the broader grocery market—online ordering coupled with in-store pickup—to explode, even as more and more brick-and-mortar grocers feature home delivery. Already, in the small Kentucky town in which I reside, the home delivery banners and billboards are up, with options ranging from Walmart to a local grocer. Expect natural and organic products to infiltrate the broader grocery market at an even faster pace. And expect Amazon to not stop with Whole Foods, expanding its brick-and-mortar infrastructure—and gobbling up more grocery market share—with the purchase of one or more additional grocery chains, perhaps including a major banner.
-- by David Lummis, market research analyst