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Amazon’s price-slashing plan for Whole Foods rattles industry

A Loblaw employee works in the dairy section of a Toronto store. Loblaw has had an e-commerce offering since 2014.

Kevin Van Paassen/The Globe and Mail

Amazon.com Inc.'s plan to slash prices at its newly acquired Whole Foods Market Inc. grocery chain has sent shock waves through the North American food retailing industry, as established players brace for fast-rising competition in online food shopping.

The e-commerce giant on Thursday said it will cut prices on a range of Whole Foods products, from avocados to almond butter, starting Monday. The high-end, organic-focused grocery store will also begin selling food on Amazon's various websites and installing "click and collect" lockers in stores.

Grocery stocks in the United States slumped this week in response to the news. Kroger shares fell more than 8 per cent on Thursday, while Costco shares declined about 5 per cent. Shares of Wal-Mart, often seen as Amazon's main retail competitor, fell about 2 per cent. Shares of many North American grocery chains fell sharply in June, when Amazon announced it was acquiring Whole Foods in a $13.7-billion (U.S.) deal.

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Whole Foods has 436 locations in the United States, compared with Wal-Mart's more than 4,600, and it focuses on wealthy shoppers, a slow-growing market compared with the discount side of the industry.

But Amazon's competitors fear its expertise in e-commerce and logistics will help Whole Foods drive down prices and hurt the profit margins of traditional retailers. It wouldn't be the first time Amazon has started price wars with brick and mortar retailers, as it did with booksellers such as Barnes & Noble in the 1990s. In a statement this week, Amazon and Whole Foods declared "the two companies will together pursue the vision of making Whole Foods Market's high-quality, natural and organic food affordable for everyone." Amazon in recent years has quickly expanded its presence in the Canadian retail market, though its impact on the grocery industry is likely to take longer here than in the United States, analysts say.

Whole Foods operates only 13 stores in Canada, concentrated in Vancouver and Toronto. Its expansion into Canada has been sluggish, with the addition of around one store per year since entering the market in 2002. Whole Foods does not now have the scale in Canada to take a significant chunk out of business from the big players. Its aggregate sales of around $360-million "is an inconsequential amount in the context of the overall Canadian grocery industry [$80-billion to $100-billion (Canadian) depending on definition]," BMO Capital Markets analyst Peter Sklar wrote in a June research note.

The simplest way for Amazon and Whole Foods to quickly expand their footprint enough to seriously threaten Canadian retail giants in Canada would be to acquire an existing company, according to National Bank of Canada analyst Vishal Shreedhar. But this isn't likely, Mr. Shreedhar wrote in a June research note, as "the Canadian food retail market is substantially consolidated … Loblaw and Empire are family-controlled and Metro doesn't have a national presence. Wal-Mart and Costco are large multinationals which are both materially larger than [Whole Foods]."

Still, nobody underestimates the ability of Amazon to disrupt an industry it chooses to target. When it announced the Whole Foods deal, shares of Canada's large publicly traded grocers dropped around 4.5 per cent, on average. On Thursday, shares of Loblaw Cos. Ltd., Metro Inc. and Empire Company Ltd. (Sobey Inc.'s parent company) all fell moderately.

Canada's big grocers are launching their own e-commerce offerings, Kathleen Wong, consumer staples analyst with Veritas Investment Research Corp., pointed out in an e-mail.

Loblaw has had a "click and collect" program since 2014, that is now available in 140 stores across the country. Metro likewise launched a "click and collect" program last year along with home delivery. The company also purchased Montreal-based MissFresh, which focuses on ready-to-cook meal delivery. Sobeys has home delivery and click and collect programs at its IGA stores in Quebec.

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"Given the small market share of Whole Foods and the expensive home delivery model of Amazon/Whole Foods, we do not believe it will have a major impact on the Big Three Canadian grocers," wrote Ms. Wong.

Over the short term, Ontario's minimum wage hike is likely to exert more downward pressure on grocery stocks than challenges from Amazon, said Tal Woolley, consumer analyst and co-head of research at Eight Capital.

"The Street is trying to price the impact of minimum wage, because it's clear and concrete," said Mr. Woolley. "The Whole Foods situation is a much longer secular issue for the market to deal with, so that's harder to price."

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