Increased credit risk attributed to Amazon disruption of food retail industry
The Quick and Dirty
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Amazon made waves with their recent $13.7 billion acquisition of Whole Foods, a move that Cooper Smith, director of Amazon research at L2 Inc., said "Within the next five years Amazon will become a top five grocer in the U.S.," ... "In order to sustain their growth, they have to enter this market." The Amazon effect on retail has not gone unnoticed, and is considered by many to be the largest driver in the decimation of large-box retailers, specifically those in the consumer electronics space.
The Future of Online Grocery
According to a report by www.marketwatch.com, shoppers have been reluctant to have their perishables like meat, vegetables and dairy delivered to their homes. In some cases, it’s an issue with “touch and feel”; customers want to choose these items to their personal specifications. In other cases, there are concerns about having delivered grocery items sitting on the front step languishing for long periods.
“Many of the product quality concerns may be instantly mitigated by the fact that Amazon acquired Whole Foods, a high-end grocer with a reputation for having the highest quality products, rather than a value grocery store,” said Ryne Misso, director of marketing at Market Track, a market data and analysis company. “If Amazon can successfully combine their value and convenience formula with Whole Foods’ top-end product quality, consumers may have fewer concerns about buying online for delivery.”
As of the fourth quarter of 2016, analysts at Cowen & Company estimates Prime membership was at about 50 million.
Data from Slice Intelligence shows that online grocery grew 44.6% in 2016 versus 2015. However, Moody’s said in a March note that online food sales account for less than 1% of the $1 trillion U.S. grocery market. “While more than one-third of grocery shoppers have ordered groceries online, the majority are still shopping at brick-and-mortar stores for their grocery needs,” said Diana Smith, associate director of retail and apparel at Mintel, in a statement.
Amazon currently has 18% of the online grocery market share, according to Slice.
With Whole Foods, Amazon can add to its Amazon Fresh grocery delivery service for which Prime members pay an additional $14.99 a month. Many experts emphasize not just the brand value in the grocery space that comes with acquiring Whole Foods, but the real estate. Whole Foods adds about 430 bricks-and-mortar locations to Amazon’s arsenal, which can serve as distribution centers and pickup sites for online orders. Moreover, Amazon has the background in quick, convenient and accurate delivery.
“This acquisition is proof that Amazon understands that in order to be successful in the grocery industry, having delivery only is not an option, but that both the brick-and-mortar store together with options like click-and-collect and delivery is critical to succeeding with the modern customer,” said Chris Bryson, CEO of Unata, a cloud-based platform for the digital side of grocery shopping.
“Amazon Fresh customers may no longer have to make delivery reservations days or weeks in advance,” Wedbush analysts wrote in a Monday note. “We see Whole Foods stores as ideal outlets for popular Amazon products such as Echo, Fire TV, and Kindle given the favorable demographics of the customer base.”
Not everyone thinks Wal-Mart is the company with the most to lose. “By going upmarket in acquiring Whole Foods, this will have more of an impact on Target and Costco than if they had gone after Kroger, for instance, which would have more directly affected Wal-Mart,” wrote ConsumerEdge Research in a Friday note.
“The Whole Foods customer is the Prime customer,” said Smith, who defines the demographic as “high- earning, young millennials.” Amazon is asking itself how it can “capture as much of their wallet as possible.”
To that end, it’s not Amazon’s goal to necessarily be the top grocer overall in the U.S. Rather, according to Smith, Amazon wants to be among the top five in its core markets, places where these affluent millennials can be found: San Francisco; New York City; Boston; Austin, Texas; and Philadelphia.