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Digesting a Grocery Deal: The Whole Foods Takeover

Posted Aug 18, 2017, 11:29 AM | By Edward Golding

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When my wife and I do groceries, we always shop using the Flipp app—it lets us price-match the week’s best deals and save money at our local Real Canadian Superstore.

The use of a digital app on our phones is a small example of how technology can influence everyday shopping habits. The next breakthrough may take place in your home, now that Amazon Inc. is scaling up plans to deliver groceries you buy online.

In June, the world’s largest e-commerce company announced a US$13.7 billion takeover of Whole Foods Market Inc.—the upscale natural and organic foods supermarket chain with foodie credentials.

After years of dabbling in food delivery, this catapults the e-commerce leader into a major grocery industry player, acquiring more than 400 brick and mortar locations in the U.S. and about a dozen in Canada. The company issued some US$16 billion in bonds to finance the acquisition this week.

I’m not sure I will personally start shopping at “Whole Paycheck,” but I can see how Amazon’s big move into the grocery business may help it succeed in its efforts to bring food to our front doors.

You’ll find a serving of Amazon in the MD cart

We’re following the action in the grocery aisle, as Amazon is a key holding in several MD portfolios, including a 3.58% weight within MD American Growth Fund, and a 1.81% allocation to MDPIM US Equity Pool as of August 15th.

The news isn’t about online retailers winning over physical retailers, says Tom Delong, analyst with MD sub-advisor Janus Capital Group. In many ways, Amazon is already a physical retailer: it has been building 20 new distribution centres a year. With Whole Foods, it adds a well-established food distribution operation that can help it improve efficiency to deliver fresh goods to your doorstep.

“Think of the evolution in delivery options, from one week to two days to two hours,” says Delong.

There’s opportunity for Amazon to extend offerings to its premium Amazon Prime business. Most Prime members are also Whole Foods shoppers, says Delong, and that overlap is key.

Amazon could use customer data to tailor shopping experiences or automatically deliver routine items to your door. It’s no stretch to think it could use AI to figure out what else you might want, when you want it, and send it to you with a return option. 

Trouble in the grocery aisle

The market’s initial response to the buyout suggests sentiment that Amazon will disrupt the grocery and food distribution businesses—much as it reshaped book selling and publishing.

Stocks of major grocers and food distribution companies tumbled the day of the Amazon announcement: Walmart declined 4.7%; Kroger was down 9.2%; Sysco Corporation declined 3%; and Sainsbury was down 2.5%.  While some prices have rebounded, many investors are now questioning traditional business models and looking for guidance to address Amazon’s entry.

Food for thought on the future of shopping

Amazon can use its reach, technological advantages and willingness to live on slim margins to transform grocery shopping, says Delong.

In Seattle, the company is testing Amazon Go, a cashier-free convenience store that lets you walk in and pick up the items you need, automatically billing your account as you leave. Food delivery subsidiary AmazonFresh recently opened drive-up grocery stores in the same city. Amazon Prime offers fresh meal kits in some markets.

Competitors will follow suit to automate or add technology, but it’s more difficult to realign distribution or alter buying patterns.

“The long-term trend is that the store is where you and your phone are,” says Delong. “The store is your front porch.”

It’s amazing how quickly technology seeps through our lives. How long before my use of a smartphone app inside a store may become obsolete?

I’ll keep this in mind next time I click my way through the aisles of our local grocer: If Amazon can successfully transform the shopping experience, it could be good for consumers and our investment returns. 

Edward Golding

Edward Golding, CFA, MBA, is a Portfolio Manager with the Investment Management team at MD Financial Management. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.