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Amazon shakes up grocery sector with $13.7-billion Whole Foods deal

Customers leave the Whole Foods Market in Boulder, Colorado May 10, 2017.

RICK WILKING/REUTERS Inc.'s plan to purchase U.S. organic supermarket chain Whole Foods Market Inc. for $13.7-billion (U.S.) threatens to eat away at the incumbent grocers' bottom line as they feel the heat to bolster their low-margin e-commerce operations.

The Amazon takeover comes as a warning signal to traditional food retailers and suppliers as they struggle with the prospect of having to take on Amazon's massive purchasing muscle and relentless push to reduce costs in an already razor-thin-margin grocery industry. Shares of those rivals, including discount titan Wal-Mart Stores Inc., tumbled on Friday.

Amazon will gain a network of almost 460 stores – mostly in North America, 13 of them in Canada – marking the online retailer's single-biggest move into bricks-and-mortar retail. It will compete with traditional supermarket chains, including Loblaw Cos. Ltd., Sobeys Inc. and Metro Inc., as well as Wal-Mart, the largest grocer south of the border that is also quickly gaining ground in Canada.

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"Amazon is going to dictate the rules within the industry much more significantly with this acquisition," said Sylvain Charlebois, dean of Dalhousie University's faculty of management in Halifax. "If I were Metro, Loblaws or Sobeys, I'd be concerned."

Amazon's swallowing of Whole Foods could finally help the e-commerce powerhouse gain a foothold in fresh food retailing, a feat it has yet to accomplish after having expanded significantly into other categories – including books, apparel and electronics – putting pressure on retailers in those sectors.

"It certainly would change the rules of the game if Amazon were able to deliver a fresh-food offering similar to what you get in a Whole Foods store," said Peter Chapman, president of grocery consultancy GPS Business Solutions in Head of St. Margaret's Bay, N.S.

E-commerce food sales make up less than 5 per cent of the North American grocery market, which is a far cry from the 20-plus-per-cent online shopping sales in the overall Asian market, Mr. Chapman said, citing researcher Nielsen's data.

In Canada, e-commerce penetration is even lower – estimated at as little as 1 per cent to 2 per cent of the $140-billion market – as industry players have been slow to offer online shopping. Now that may change.

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Loblaw, the country's largest grocer, offers click-and-collect e-commerce, which entails shoppers ordering online and picking up their purchases at the stores. Other rivals, including Wal-Mart and Metro, have followed suit, although Wal-Mart is testing fresh-food deliveries in Toronto.

And while already sells packaged groceries online in Canada, it has yet to offer fresh food, which is a tougher and more expensive logistical undertaking requiring trucks with refrigerated storage and staff handling numerous and often bulky packages and deliveries.

Even so, e-commerce packaged grocery sales growth is fast outpacing that in brick-and-mortar stores, said Carman Allison, vice-president of consumer insights at Nielsen Canada. Those online sales rose 8 per cent to $2-billion in Canada in the year ended April 1 – and are expected to increase 20 per cent annually until 2020 – while grocery sales in physical stores are in decline. Those latter sales dropped 1 per cent to $103.5-billion in that same period, his research found.

Amazon's latest planned takeover "is a testament to the digital disruption of the grocery landscape," Mr. Allison said, noting the acquisition "brings together a combined strength in digital and brick and mortar."

Fresh foods have been a critical battlefield for grocers as consumers have increasingly shifted their spending to fresh from processed fare in a bid to eat healthier, industry experts say. And 75 per cent of consumers prefer to purchase fresh foods in person rather than online, Nielsen data show. Now Amazon will try to steal that growing but lucrative portion of the business from incumbents with the help of the acquisition, industry watchers said.

Even restaurant operators will feel the pinch of Amazon's takeover of Whole Foods, which has a $3-billion restaurant business. Indeed, the acquisition "is a seminal moment in the world of eating," said David Palmer, retail analyst at RBC Dominion Securities.

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Amazon is speeding up its delivery capabilities in select markets to as fast as one hour, Mr. Palmer noted. "The combined company is poised to become a category killer in the home meal solution business," he said.

The acquisition of Whole Foods doesn't come as a surprise to many observers as they watched the supermarket chain struggle amid fierce competition in the organic and fresh-food segment. Ben Conwell, a former logistics director at Amazon, said the online retailer took a hard look at acquiring Whole Foods last year but chose not to move forward on it then.

"This is a tremendous shot in the arm for Amazon's efforts to finally find a way to run its fresh and nascent retail-store offerings profitably," said Mr. Conwell, who now heads the e-commerce division at realtor Cushman & Wakefield.

Amazon, which struggles to be in the black, has started to launch its own brick-and-mortar stores. It has rolled out a convenience store which has digital checkouts for customers, ensuring they don't have to wait in lineups.

"While not perfect, the Whole Foods supply chain infrastructure is a hugely valuable asset" for Amazon, Mr. Conwell said. "And nobody is better-suited and capable of taking the existing Whole Foods supply chain infrastructure and making it much more efficient than Amazon is. The status quo is only the start here."

Loblaw spokespeople declined to comment on the Amazon takeover. Wal-Mart Canada spokesman Alex Roberton said its customers want to shop in a lot of different ways to save money. "We are confident our network of 410 stores and our fast growing e-commerce and online grocery offering will continue to meet and exceed our customers' expectations."

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More


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