Grocers facing a united Amazon-Whole Foods must adapt

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Editor's note: Amazon became a major player in the supermarket business overnight after the online retailer said it was buying upscale grocery chain Whole Foods for US$13.7 billion, including debt, a premium of 27 percent over Whole Foods' presale share price.

Explaining the rationale, Deutsche Bank said Amazon's move would notably increase touch points with customers, as food & beverage accounted for the biggest share of consumer spending in 2016.

"We thought Amazon was thrifty in its offer", said Charles Kantor, managing director at Neuberger Berman Investment Advisers LLC, which owns around 2.7 percent of Whole Foods shares and had pressured the company to take steps to improve its stock price.

"Other potential bidders: In theory, all retailers that sell food and compete with AMZN because we think most have too much to lose not to bid".

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But if Amazon can be the one-stop shop for everything - groceries had been one of the key missing elements - customers would have even less of a need to go to Walmart or elsewhere.

He said: "We think the deal says that entry into food retail from the outside is just too hard, but the limitations of the store pick model mean its market share progress might still be subdued short-term".

In May, under pressure from Jana Partners, Whole Foods replaced five board members and its chief financial officer.

So why would anyone assume Amazon's acquisition of Whole Foods would face regulatory scrutiny? Shoppers must use the Amazon Go app, which features "just walk out" technology that automatically detects all the products they've taken off the shelves. Seeing the Whole Foods brand on the grocery bag likely reduces this concern, which may encourage online grocery orders. Though it's not yet clear whether Whole Foods will continue to operate with its current strategy but it is likely as Mackey will continue to operate as CEO.

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In fact, Amazon's acquisition of Whole Foods helped bring a surge to the company's stock, adding $1.8 billion to Bezos's net worth. At the margin, if this move makes the current USA branded food players more likely to sell out to Kraft-Heinz, or catalyzes a reduction in stock prices that makes Kraft-Heinz more willing to engage with them, then this could be a good signal for Kraft-Heinz's acquisition prospects overall. In an email to customers, the company said it planned to maintain the same standards under Amazon, including bans on artificial flavors and colors.

Amazon could try to cut operational costs at Whole Foods by using the same types of robots that already move inventory around at its e-commerce fulfillment centers. That's business that comes right out of traditional grocery retailers. So a few more acquisitions like this can change the retail landscape overnight and catch competitors off guard.

"Amazon already has an affinity towards supplying foods with strong provenance, organic benefits, or very specific health needs", he added.

Whole Foods 365 offers private-label goods and lower prices than typical Whole Foods stores, and is targeted at younger, value-conscious shoppers. Wal-Mart is not now testing anything similar, though the company is working on initiatives such as an automated shopping cart to make it faster and easier for customers to pick up their daily grocery needs.

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