Introduction

The financial world is abuzz about Amazon’s offer to purchase Whole Foods for $13.4 billion. Before speculating about Besos’ plans, it is worth standing back a bit and put this in its global economic context. First off, we are not just talking about Amazon entering the grocery industry. Once a digital company is established in retail, there are significant economies of scale in entering other retail sectors.

But in “food,” we are seeing the merging of the physical/geographic and digital retail. How will Besos use Whole Foods? And further down the line, what technologies will win out in delivering digitally-purchased goods? Will it be drones, driverless trucks, or what?

These and other questions are addressed below.

The Global Context – There Is Plenty of Competition

Table 1 provides detail on the largest global “sellers.” Wal-Mart is in a class by itself with $486 billion in sales. It is notable how slowly most of these companies are growing relative to Amazon. The vast majority of these companies sell from “physical” stores and they are all rushing to add digital sales to their offerings. It is notable that in 2014, Amazon lost money. This has never been much of a concern for Besos. Investing for growth is all that matters. Dividends? Forget it!

Table 1. – Largest Retail Companies in World, 2014

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Source: Deloitte: 

The US dominates the Table 1 listings: of the 20 companies listed, 9 were launched in the US. In large part, this is because of America’s huge domestic market. Many of the others listed sell more overseas than domestically.

Table 2 lists the leading companies ranked by e-commerce sales. Many of the companies listed there are primarily traditional retailers but primarily because of their overall size. For example, only 2.5% of Wal-Mart sales are generated via e-commerce. Again, the US dominates e-commerce with half of the 24 companies listed coming from the US. Three Chinese companies on this list while none appeared in Table 1. As one might expect, the compound annual growth rates of the e-commerce companies are much higher than the growth rates of the traditional retailers that dominate Table 1.

Table 2. – E-commerce Sales, Leading Companies, 2014

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Source: Deloitte: 

So what can we conclude from this data? Amazon is large, but there are many companies with considerable resources coming after Amazon. As a serious online shopper, I discovered jet.com several years back. For most products, it was undercutting Amazon on price. Last year, Wal-Mart bought jet.com for $3.3 billion. Wal-Mart, coming from traditional department store dominance, is ramping up is online operation as rapidly as it can to compete with Amazon in e-commerce. Wal-Mart put Jet’s chief executive, Marc Lore, in charge of its overall e-commerce business.Incidentally, one can buy “Kirkland” products on Jet. Kirkland is the “house brand” of Costco. Numerous “cross deals” are being made….

In addition, large sums are being invested in “niche” e-commerce companies with the goal of either breaking off a part of the business for themselves or aiming to be bought out by the larger players.

The US Grocery Industry

This is a tough, competitive business. And a revolution is underway within the traditional/physical segment of the industry. A recent Bain & Company study of nearly 2,800 US shoppers at traditional grocers such as Kroger and Safeway, mass retailers such as Wal-Mart and Target, and club stores such as Costco and Sam’s Club shows what is happening to the US grocery industry:

“Prepare to see America’s grocery landscape change before your eyes. The same hard discount grocers that have shaken up Europe are accelerating their growth in the US, giving shoppers even more choice and creating new competition for traditional supermarkets and mass retailers. German discounter Aldi, which now operates 1,600 stores in the US, already has plans to open about 400 more stores by the end of 2018, while simultaneously embarking on a $1.6 billion remodeling effort to give existing stores a more upscale look. And we’re in the early days of Lidl’s big launch into the US market, which is likely to add as many as 500 locations in the next five years. All told, we expect the deep discount segment in the US to grow by 8% to 10% annually through 2020—that’s five times the rate of traditional grocers. This torrid pace of growth is fueled by discounter store economics that quickly generate cash to reinvest into both store expansion and remodeling programs that attract new customers.”

ALDI is the poster child for what is happening. The model:

• Fewer choices dominated by private labels;
• Payroll savings via displaying goods in shipping boxes they came in,
• Getting customers to bag their own purchases,
• Charging customers for shopping carts with refunds if customers return carts properly and
• Checkouts are quicker because bar codes are displayed on most sides of each product.

Bain’s conclusions for traditional grocers:

• Rule 1: Embrace your own private brands before your shoppers embrace someone else’s.
• Rule 2: Lead with fresh.
• Rule 3: Get more convenient while your competitors get less so.
• Rule 4: Transform your cost structure, don’t just tweak it.
• Rule 5: Use advanced analytics to unlock new sources of value.

How does this apply to the Amazon purchase? It is not clear. Whole Foods is a “traditional” grocery store and not at all discount! 460 stores in the United States, Canada and Britain with sales of $16 billion in the last fiscal year.

What Does Besos Want to Do with Amazon?

 Keep in mind that Amazon Web Services alone are a $14 billion business. And physical retail is still 90% of consumer purchases excluding car and fuel sales. Besos has plenty of options with Whole Foods. Maybe he is not sure yet just what he will do. Here are some of the options:

1. There are huge economies of scale in retail. In adding Whole Foods, Besos will reap significant scale benefits. Whole Food employees should be worried about losing their jobs.
2. Add fresh food to his lineup. With his efficient supply chain, Amazon should be able to deliver fresher foods than traditional stores.
3. Delivering products to people’s homes is hugely expensive Perhaps Besos will use Whole Foods stores as pickup/return sites for other Amazon purchase and/or mini-warehouses.
4. Amazon is already playing around hi-tech, cost-saving solutions. In Seattle, it recently opened two grocery drive-through stores where customers can pick up online orders, along with a convenience store called Amazon Go that uses sensors and software to let shoppers sail through the exits without visiting a cashier.

Investment Opportunities

Table 3 provides financial data on the leading retailers. But as I said earlier about energy transitions: “Energy transitions are fascinating. But when it comes to investing, take care. History tells us that during transitions, much money is made and lost as bets are made on different technologies.” I believe the same things hold for the grocery industry. Some of the uncertainties are discussed above. And we did not even mention the upcoming competition between drones and self-driving trucks for deliveries. Again I say “Take care!”

Table 3. – Financial Data – leading Global Retailers

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Sources: 

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