Amazon's deal for Whole Foods adds new element to burgeoning
market
By Heather Haddon and Julie Jargon
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the US print
edition of The Wall Street Journal (June 30, 2017).
Even before Amazon.com Inc. put a supermarket chain in its cart,
U.S. grocery delivery services were racing to grab hold of new
regions, spending millions to gain a larger share of the
fast-growing market.
Now, with the e-commerce giant planning to buy Whole Foods
Market Inc. for $13.7 billion, giving it a large foothold in the
food retail industry, the stakes are all the higher for companies
such as Instacart Inc., Peapod LLC, Shipt Inc. and FreshDirect LLC
to deliver not only fresh food -- but continued growth.
Midwestern grocery chain Schnucks Markets Inc. is expected
Thursday to announce its partnership with Instacart for online
delivery will extend to most of its 100 stores by next month. Ahold
Delhaize's Peapod is expanding its push into New York City, a key
market, after spending more than $94 million on a warehouse in
Jersey City, N.J., in 2014.
Shipt, which delivers food orders for retailers including Costco
Wholesale Corp., Meijer Inc. and Whole Foods, intends to almost
double its markets by next year, from 51 to 100. Founder Bill Smith
says the company's expansion is targeting suburban customers in
less saturated regions like the South and the Midwest to gain an
edge.
The largest U.S. food sellers, Wal-Mart Stores Inc. and Kroger
Co., meanwhile, are testing delivery services using Uber
Technologies Inc. and Lyft Inc.
It isn't clear whether Amazon acquiring Whole Foods will remake
grocery shopping in much the same way the company has changed
book-buying.
Concentrated in cities and surrounding suburbs, grocery delivery
is still a small business, accounting for less than 2% of last
year's $715 billion in food-retail sales, according to
food-services research and consulting firm Technomic Inc. Amazon
already makes up more than half of online food orders through its
Fresh, Prime and Prime Now services.
Seventy percent of respondents to a survey by supply chain
consulting company AlixPartners LLP last year said they had no
intention of having groceries delivered. Grace Herrera, a
59-year-old caregiver in California, said she'd rather spend time
shopping than pay extra for delivery. "I have time to go to the
store," she said.
Margins also remain an issue. Razor-thin to begin with, they've
dropped in recent years as falling food costs sparked a price war.
And in the online world, the learning curve for how to sell fresh
foods has created an added drain.
Ocado Group PLC, the biggest online grocer in the U.K. and one
of the few public ones, posted its first full year of profits in
its fiscal year ending in November 2014 and averages transaction
sizes of $140 per order, compared with $32 for the typical
brick-and-mortar supermarket, according to Barclays Capital Inc.
About 0.7% in Ocado's annual sales of product is wasted from
spoilage, a leader in the industry, a spokeswoman said.
Still, delivery is one of the fastest-growing segments of an
otherwise sluggish supermarket sector. Online sales of consumables
grew by 21% in 2015 over the previous year, according to the
Willard Bishop grocery consulting firm.
The planned partnership between Amazon and Whole Foods is a new
challenge for delivery services vying for that growth, said Bill
Bishop, co-founder of Brick Meets Click, an e-commerce grocery
consulting firm. Whole Foods' 466 stores could serve as
mini-distribution centers in densely populated, affluent areas;
Amazon, which has demonstrated a willingness to forgo profits for
years to build up market share, could use its e-commerce prowess to
cut the specialty grocer's prices to near those of its
competitors.
"This gives them another way to drive up penetration in grocery
purchasing and ultimately delivery," Mr. Bishop said.
Peapod executives say that being owned by a large retailer like
Netherlands-based Ahold Delhaize allows the delivery service to
bargain with suppliers for lower prices. They add that Peapod is
profitable in markets where it has operated for at least a
decade.
"We are the original online grocers and have outlasted many of
the competitors who have come and gone," said Jennifer Carr-Smith,
chief executive of the Skokie, Ill.,-based company, which was
founded in 1989 and took its first orders by fax.
FreshDirect didn't respond to requests for comment.
Brick-and-mortar supermarkets are wrestling with whether to
invest in their own delivery services, cede profits to startups or
risk losing more business to Amazon. For grocers who use Amazon
Prime to deliver to their customers, the Whole Foods deal presents
a particular challenge.
Natural health-food chain Sprouts Farmers Markets Inc. will
continue to use Prime to deliver groceries for now, said Bradley
Lukow, chief financial officer for the Phoenix-based company.
"We'll make the determination going forward if we want to make any
changes," he said at an industry conference last week.
Schnucks chief marketing officer Andrew Nadin said the grocery
chain was planning to expand its partnership with Instacart even
before Amazon set out to buy Whole Foods.
"We've never tried to out-Wal-Mart Wal-Mart. We won't try to
out-Amazon Amazon," he said.
Instacart, founded by a former Amazon engineer, aims to be able
to deliver to 80% of U.S. households next year, up from 69% today.
In addition to stores like Wegmans Food Market Inc. and Target
Corp., Instacart currently handles deliveries for Whole Foods.
Analysts expect that to end.
Instacart wouldn't comment on its partnership with Whole
Foods.
"Amazon is here," said Nilam Ganenthiran, Instacart's chief
business officer. "Grocery retail is going to have to respond."
--Laura Stevens contributed to this article.
Corrections & Amplifications About 0.7% in annual sales of
Ocado Group PLC's product is wasted. An earlier version of this
article cited data from a Barclays Capital Inc. report that
incorrectly said about 30% of Ocado's fresh produce is wasted
daily.
(END) Dow Jones Newswires
June 30, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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