What Amazon’s Whole Foods deal means for Australia

AMAZON’S acquisition of niche US grocery chain Whole Foods could be replicated in Australia when the e-commerce giant arrives.

AMAZON’S $18 billion acquisition of niche US grocery chain Whole Foods could be replicated in Australia when the e-commerce giant arrives, analysts say.

The deal, which netted Amazon 460 storefronts in the US, Canada and the UK, rocked the US retail sector on Friday and has been described by industry analysts as a “seismic” event, despite the up-market grocer’s relatively small size in those markets.

At $US13.7 billion, the deal is 70 times larger than its other 20 deals combined, and dwarfs its previous largest acquisition of online shoe retailer Zappos.com for $US1.2 billion ($1.6 billion) in 2009.

The announcement on Friday sent shares in US listed retailers Kroger, Target, SuperValu, Costco and Walmart plunging.

In a note on Monday, Citi analysts led by Brian Raymond said the acquisition represented a shift in strategy for Amazon towards acquisitions, grocery and omni-channel retailing.

“This acquisition reflects the challenges of pure-play online grocery,” Mr Raymond wrote.

“Whole Foods provides Amazon with a (primarily leased) 460 retail store footprint across 42 US states, serving as distribution points and pick-up locations. Online grocery remains at around 2 per cent in the US despite 20 years of investment. In our view, this acquisition is not about access to product. Amazon has partnered with retailers such as Morrisons to solve range issues in the past.”

The Australian grocery sector is far more consolidated that the US, making an acquisition of Woolworths or Coles unlikely given the size of the acquisition relative to the market opportunity, according to Citi.

“After adjusting for Australia’s population, the Whole Foods acquisition is the equivalent of a 34 store, $1.5 billion turnover business in Australia. The store base is half the size of Ritchies IGA and a quarter of the size of Foodland SA. An acquisition of this scale is feasible if the geographical store footprint proved attractive.”

Struggling IGA supplier Metcash is an unlikely target, however. “Whole Foods is an acquisition of a retail footprint, rather than product or logistics capability. We expect Amazon would build or partner to solve these challenges and do not see Metcash as an acquisition target.”

Citi says while Amazon will be disruptive to all retailers when it enters Australia, access to product and distribution points will determine its success, particularly in grocery.

“Amazon’s penetration in grocery is likely to be small and pricing to be less disruptive as Amazon has (to date) taken a premium approach to grocery, with price points above major bricks and mortar competitors. As a result, we see less risk to Coles and Woolworths from Amazon than discretionary retailers.”

Whole Foods holds just 1.2 per cent of the US food and grocery market, while Amazon has just 0.2 per cent, according to research firm GlobalData Retail. Wal-Mart is the biggest with 14.5 per cent share, followed by Kroger with 7.2 per cent.

“It’s a big deal because of Amazon and what Amazon can bring to the game,” CFRA Research analyst Joe Agnese told AFP.

“Amazon is thought to bring change and an acceleration of change, and so having the presence of Amazon there may lead to a faster moving push into food delivery and lower prices.”

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