The knee jerk reaction from the Amazon bid for Whole Foods in the US hit the Australian market as suspected, with brokers analysts and others sprouting all sort of nonsense and rubbish about what it means down under.
A few brokers and analysts though pointed out that the threat from Amazon had still to eventuate here, and there was every chance its attention would be diverted by making its biggest every acquisition work.
That appeared small comfort to investors. Woolworths (BigW) shed 3.5% – the biggest single drag on the index (but the ASX 200 jumped 31 points so Amazon had no impact whatsoever) – while Wesfarmers (Coles, Target and Kmart) lost just 0.2%. Metcash fell 2.3%.
Harvey Norman fell 3.1%, JB Hi-Fi was down 2.7%, Premier Investments lost 1.5%, Myer retreated 2.2%, Super Retail Group closed 3.4% after last week’s 12.6% jump and The Reject Shop fell more than 3.2%.
Yesterday saw muted headlines in Australia about Amazon’s $US13.7 billion (around $A18 billion) bid for Whole Foods.
While the frothing was more extreme in US reports at the weekend, the Financial Review stood out with the screaming Page 1 lede “Jungle king tears into groceries. The online headline on the story was even more alarmist (and intelligible)" Amazon’s Whole Foods deal raises ‘threat level’ for Aussie retailers
Well, that’s not quite the reality: This deal should be seen as Amazon throwing in the towel on online only groceries and food sales. It started its fresh food online business a decade and has gained no traction whatsoever in the US, Canada and Britain.
It has realised it needs to co-opt one or two of the various legacy rivals all the experts reckoned it would destroy – just as it has ‘disrupted other sectors like books, music, clothing, cloud computing etc.
But last time I looked there are still book and music shops around, vinyl records are making a steady return, music streaming is stealing Amazon’s CD and eBook sales around the world fell 4% in 2016 according to Nielsen (https://www.theguardian.com/books/2017/mar/14/ebook-sales-continue-to-fall-nielsen-survey-uk-book-sales) for the second year in a row. Stockmarket analysts seem to miss some of those moves, especially in Australia.
Amazon stared its fresh food business in 2007 and by last year had a market share of less than 0.2% in an industry with around $US612 billion in annual revenue (according to IBISWorld).
Whole Foods had 1.21% – Wal-Mart dominates with 14.5% (all estimates from IBIS World). Amazon was going nowhere in the US, while in the UK it tried to do a deal with upmarket retailer, Waitrose to be its grocery supplier, but was told to ‘go away’ and Amazon signed with WM Morrison – the 4th biggest UK grocery chain.
The Whole Foods bid means Amazon has realised it can’t replicate its existing business (huge warehouses and smic logistics system) in food and groceries and needs outside help and expertise.
In fact online food is not a big deal financially at the moment and won’t be for a while. According to Euromonitor International internet sales of food and drink topped $US74 billion last year worldwide, up from $US29 billion in 2011 and forecast to reach $US116 billion by 2021.
Global grocery and food sales are in the trillions of dollars, much of it in hard to measure China, India, Africa and South America. Amazon is not gong to change the world of food, despite all the breathless commentary claiming just that.
According to Kantar, a big global research firm, buying a bricks-and-mortar chain is a “tacit admission from Amazon that food retail is incredibly difficult as a pure online player,” according a report in the Financial Times. And Moody’s analyst, Charlie O’Shea pointed out in numerous media reports at the weekend that in no sector is physical footprint more important than food.
“Dairy has to be delivered quickly. Just like what Walmart did last year in buying Jet.com, Amazon recognises that it’s more effective to buy it than build it.” And another analyst pointed out that “Building a cold supply chain with refrigerated trucks is not easy or cheap to do.” One analyst pointed out that Wal Mart is learning faster about Amazon’s business (online) and Amazon is learning about online food sales.
Whole Foods is supposed to accelerate that learning curve. How many local ‘experts’ have mentioned that and other drawbacks in their alarmist reports (Citigroup, Credit Suisse and Morgan Stanley).
Amazon has a big fix up to do quickly on Whole Foods and integrate it into its systems – a big ask for a company that doesn’t know how to sell to the public except on the basis of online offers and technology – that won’t work in a physical store.
Investors will demand more information from Amazon about its grocery business once the deal is done. Giving out information isn’t one of Amazon’s best points.
Amazon shares have recent topped the $UA1,000 mark (and closed just over $US987 on Friday) Those shares will come under pressure if the information on the grocery business isn’t forthcoming from next year onwards.
