Amazon Acquires Whole Foods: How it will Impact UK Retailers

Amazon has made a swoop on the grocery market and is set to buy Whole Foods for $13.7bn (£10.7bn). The US-based organic foods specialist currently has nine UK stores, of which 7 are in London and the other two are located in Cheltenham and Glasgow. Although the deal is still subject to shareholder and regulatory approval, it is expected to be completed towards the end of this year.

Will this be a sufficiently large base from which to challenge the dominance of our UK highstreet supermarkets? Are Tesco, Sainsbury's and Morrisons quaking in their boots at the prospect of competition from this behemoth of the retail world – and just why has Amazon decided to take on the regular food giants at their own game?

Commentators see the move as a way for Amazon to strengthen and diversify its share of the grocery market in the US and UK. It has already acquired Amazon Fresh and with the purchase of Whole Foods they will be looking to solidify their position in the grocery sector.

Amazon of course is predominantly an online retailer but they have realised that by acquiring a well respected grocer with a strong physical presence and loyal customer base they are tapping into the fact that shoppers still value a physical experience with their retailers – currently only 20% of shopping is done online.

Will it be a marriage made in heaven? Well, presumably Amazon believe it is, allowing consumers to shop flexibly – sometimes online and sometimes in a physical store. Undoubtedly their customers will expect a seamless, speedy service however they choose to shop, a continuation of Amazon's high online reputation.

David Jinks, head of consumer research at online parcel service ParcelHero believes the deal gives Amazon the opportunity to expand the cashierless Amazon Go store that has already been trialled in Seattle. "A chain of automated Whole Food stores, in the US and here in the UK, might prove attractive to busy young shoppers, hard pressed for time but interested in eating healthily; which would complement the online business," he said. It would probably be a natural progression for Amazon to expand Whole Foods' business online too.

Hugh Fletcher, global head of consultancy and innovation at Salmon (IRDX VSMN) has said: "This deal is a clear signal of intent from Amazon to dive deeper into the grocery sector. Amazon Fresh and Amazon Go were the first steps, but this shows the ecommerce player is no longer treating grocery as just another branch in its huge eco-system."

Could it be that Amazon is striving to take over the entire retail sector? The deal certainly underlines Amazon's approach to expand across both online and offline channels and to successfully intrude upon and beat competitors in the grocery sector. In the US the partnership also presents the ideal opportunity to build upon Whole Foods's vast market share and to digitally transform itself in the future.

Expanding Amazon's high street presence in major cities appears to be a huge priority for the company as it seeks to expand one-hour deliveries, a service it believes can make Amazon more convenient than physically visiting a high street shop, further squeezing the more than 80% of shopping that is still done offline.

They are developing their aerial drone technology, designed to drop small packages into customer's gardens. A full-scale drone delivery programme would be a lot easier and quicker if they could be delivered from shops on the high street, within a 10 mile flight range, rather than from their huge out of town warehouses.

In recent years Amazon has been promising ever-faster orders. Amazon Prime subscribers in some cities can buy items that will arrive in an hour or less, with packages dispatched from inner-city centres on mopeds.

How very useful this service will be for urgent (forgotten?) food items, baby essentials or ingredients delivered early evening when you get home from work for a dinner party planned later the same evening.

What effect will it have on UK retailers

Initially all the action will be taking place on the other side of the Atlantic, giving UK retailers some breathing space. Jeff Bezos is the founder, Chairman and CEO of Amazon and his goals could in some quarters be interpreted as world domination so UK supermarkets would be foolish in the extreme to ignore what is happening. He will undoubtedly throw serious money at this project which will result in (at the very least) a disruption of food retailing in this country as we know it!

Amazon's incursions into the UK grocery market so far have been small-scale – and mostly confined to London. Amazon Fresh is more developed in the US and even there its market share is only 0.8%. So, although this might at first glance appear to be a relatively positive sign for UK retail to be able to hold onto their share of the market it would be negligent of them to believe that Amazon will stop at just Whole Foods.

Morrisons revealed in February that it had signed a deal with Amazon, offering its Amazon Prime Now and Amazon Pantry customers the opportunity to buy fresh and frozen products from the grocer. Customers are able to buy Morrisons products as part of a wider Amazon shop.

“The combination of our fresh food expertise with Amazon’s online and logistics capabilities is compelling,” said Morrisons chief executive David Potts. “This is a low risk and capital light wholesale supply arrangement that demonstrates the opportunity we have to become a broader business. We look forward to working with Amazon to develop and grow this partnership over the coming months.”

At news of the Whole Foods deal, Tesco share price was down 5% and Sainsbury's 4%. Morrisons' rose 1%, presumably because of the supply agreement with Amazon in the UK and thus could become a takeover target for the US giant.

But is it all doom and gloom for UK retail? If Amazon feels the need to break into the grocery market then UK supermarkets should not conclude that their busines models are broken – indeed, Amazon is proposing an approach that looks very similar to their own: a mix of online and physical high street stores.

The more traditional retailers have always maintained that pure online shoppers don't really exist – consumers might be happy to shop online for their big weekly grocery shop but use Tesco Metros and Sainsbury's Locals as a back up.

Tesco and Sainsbury's have cast their net to catch both online and offline shoppers and Amazon apparently agrees that this is a wise way to do business.

However, Amazon has two big advantages when it comes to selling food in the UK – firstly, it understands logistics like no other and its shareholders don't expect it to make hard profits to be paid as dividends.

Our big supermarket chains are not behind hand with logistics – they now provide one hour delivery slots and Ocado has certainly forced everyone to raise their game. Amazon will be new to that game and distributing fresh and chilled products via their own vans is much harder than dispatching the latest best-seller via a third party courier. I'm sure however they will be fast learners.

Perhaps it's the fact that Amazon's investors are happy to see returns ploughed into new markets that is the biggest difference between the traditional supermarkets and the new kid on the block.

Bezos's supportive long-term investors have accepted that Amazon's mission is to acquire revenues first and worry about dividends later. The investors will be happy as long as the share price continues to rise – and there seems to be no chance of it falling any time soon.

So, what response can be expected from UK supermarkets? Well, they are big players themselves and not entirely defenceless against the wolf that is Amazon - Sainsbury's purchased Argos last year to put it ahead of the game. But investors are all too aware that Aldi and Lidl have joined the fray and destroyed profit margins in the sector – so there definitely will be concern.

Asda, Sainsbury’s and Ocado will be forced to review their delivery capabilities if they want to compete with Amazon’s business, leading to increased innovation and investment. Currently Tesco is investigating faster delivery systems.

“What Amazon can offer in terms of turn around and delivery is phenomenal. There has been a lot of speculation around Tesco looking at a faster delivery system for its ecommerce, while Ocado might be looking to increase its capabilities in terms of same-day delivery with shorter time slots perhaps. It could encourage a degree of investment and innovation for other grocers,” says Clive Roberts, global insights director, TCC Global.

Figures by Mintel show that sales through the major online grocers (Tesco, Sainsbury’s, Asda, Waitrose, Ocado and Morrisons) reached £6.7bn in 2014 and is predicted to grow to £12.6bn by 2019. Tesco is by far the largest player in the online grocery market, holding more than double the share (39.1%) of its nearest rival Sainsbury’s (17.5%).

Ultimately, grocers will have to find a balance managing their online and offline environments and increase connectivity between the two – and new partnerships could prove tempting to grocers as a way to expand their online offering.

What will this mean for UK retailers?

Over the years Amazon has made a lot of big acquisitions but none of them anywhere near as big as Whole Foods. When Amazon joins the grocery sector at the end of this year they could be relentless in their attack on the market and UK retailers had better be ready for the fray.