While some observers see Amazon.com Inc.’s plan to acquire Whole Foods Market Inc. as an offensive move into grocery, it may actually be a defensive move in an area where Wal-Mart Stores Inc. dominates, some experts argue.
“has a strong physical presence, acquired Jet.com and has been making a push into e-commerce,” said Ed Yruma, managing director at KeyBanc Capital Markets. “This is Amazon retaliating and getting more into physical retail.”
Yruma owns stock in Whole Foods.
Wal-Mart acquired Jet.com in August 2016 for more than $3 billion. Since then, the retail giant has acquired a number of other sites, including women’s clothing retailer ModCloth and, just announced Friday, men’s clothing retailer Bonobos. And as a strategy change, Wal-Mart began offering discounts for some online orders that are picked up in-store and launched free two-day shipping after ending its ShippingPass pilot program. In fact, Amazon
lowered its free shipping minimum to match Wal-Mart’s.
In its latest earnings release, Wal-Mart reported a 63% increase in Walmart U.S.’s e-commerce sales. On the media call, Marc Lore, chief executive of Walmart e-commerce U.S., said the growth was driven by two-day shipping, what he called “easy re-order,” and a larger online assortment, put at about 50 million items as of May.
“We are seeing that customers are placing more orders, they are coming back more often and spending more, so we are really happy with that progress,” he said.
Grocery is an area where Wal-Mart dominates, snapping up 14.45% of the U.S. food and grocery market in 2016, according to data provided by GlobalData Retail. Amazon only had 0.19%.
“I don’t think Wal-Mart is trembling at all,” said Christian Magoon, CEO of Amplify ETFs, the company behind a number of ETFs including the Amplify Online Retail ETF
. “They’re probably feeling pretty confident that the Jet.com acquisition is paying off with online growth.”
Instead, what might cause some concern are Whole Foods’ 400-plus stores.
“That starts to encroach on Wal-Mart’s foothold,” said Magoon. “How Amazon dominates e-commerce, Wal-Mart dominates bricks-and-mortar.”
“By going upmarket in acquiring Whole Foods, this will have more of an impact on Target and Costco than if they had gone after Kroger, for instance, which would have more directly affected Wal-Mart,” said ConsumerEdge Research in a Friday note.
Amazon’s more affluent customer overlap with Target and Target’s struggles with its grocery business makes this bad news for them. “[I]n our view, Target should use today’s news to substantially accelerate its investments in price/grocery/store experience/e-commerce,” Gordon Haskett Research Advisors said.
They said it’s too soon to tell what sort of impact this will have on Wal-Mart, but they think “should Amazon choose to rapidly grow 365 [Whole Foods’ lower-priced brand] and/or acquire other players… such development would bode poorly for Wal-Mart.”
UBS thinks there’s uncertainty, but Costco probably isn’t in danger. They agree this could be a hurdle for Target.
“Costco’s limited assortment, low cost structure, and deep private label penetration probably means its fortunes will be preserved, at least for the foreseeable future,” analysts wrote in a Friday note. “We consider it to be a negative read for Target, as it could further complicate its efforts to gain traction creating a stronger, better-for-you good offering in its stores.”
UBS said it is placing its Whole Foods rating and price target under review.
Amazon shares closed Friday up 2.4%, while Whole Foods shares closed up more than 29%. Amazon shares are up 31.7% for the year so far, with Whole Foods shares up 38.8% for the period. The S&P 500 index
is up 8.7% for 2017 to date.