Local retail shares recoil at Amazon’s Whole Foods buy

Like their US counterparts, the share prices of local retailers have recoiled at Amazon’s $US13.7bn Whole Foods deal.

 

Local retail stocks have dropped sharply in early trade as Amazon.com’s plans to buy Whole Foods Market in the US for $US13.7 billion reverberate around the globe. Woolworths shares have dropped 3 per cent, while Myer, JB Hi-Fi and Super Retail Group’s share prices have all slipped between 1-3 per cent in the first local session since Amazon’s acquisition was announced in the US on Friday.

The reaction of local investors followed similar moves on Wall Street, as Wal-Mart, Target and Costco all sank into the red on the announcement, while shares in Amazon jumped 2 per cent. The online behemoth’s turn to grocery is the latest in a series of developments clouding the Australian retail sector’s future and raises fresh concerns about its ability to compete with the Amazon model.

“Amazon will be disruptive to all retailers when it enters Australia,” says Citi analysts led by Bryan Raymond, “however, access to product and distribution points will determine its success, particularly in grocery.

“This acquisition reflects the challenges of pure-play online grocery [remaining at 2 per cent in the US]. Whole Foods provides Amazon with a (primarily leased) 460 retail store footprint across 42 US states, serving as distribution points and pick-up locations.

“Amazon’s penetration in grocery is likely to be small and pricing to be less disruptive.”

With investor caution reflecting that abroad, breaking into a “more consolidated” Australian may not be as straightforward, with Citi analysts predicting an Amazon takeover of Woolworth or Coles would be “unlikely” and likening Whole Food’s US footprint to “half the size of Ritchies IGA, or a quarter of the size of Foodland SA.”

Following the latest development of Amazon’s strategy, its entry into the local market is now “more likely”, according to JPMorgan analysts, tipping online as a key area of growth for the domestic grocery market.

“The more likely prospect of an Amazon Fresh offer is in our view a negative for all food retailers,” the broker says, “the customer service offer will improve, allowing the online channel to take market share while price competition will remain intense.

“Online offerings of Australian food retailers should become a higher order priority. Woolworths has a strong omni-channel offer in Liquor while both Coles and Woolworths could improve the online offer in Food especially delivery windows and range compliance with customer orders.”

Just after 12.20pm AEST, Woolworths (WOW) shares sit 3.12 per cent lower at $25.43, Wesfarmers (WES) remains 0.5 per cent in the red at $40.49, while Myer (MYR) recovers slightly be 2.7 per cent down at $0.89.