Is Amazon’s Whole Foods Purchase Going to Completely Overhaul the Grocery Industry?

Whether or not its announcement about partnering with grocery chain Whole Foods has anything do with it, Amazon stock (AMZN) has jumped nearly 1.5 percent to outperfom its retail rivals. Experts say that the new development might not yet have had an effect, as the successful Amazon cloud business (Amazon Web Services) is likely the reason.

According to Moody’s vice president, Charlie O’Shea, “That potential is overshadowing the superior real-time operating performance of Amazon’s key retail competitors.” The lead retail analyst goes on to say, “The emphasis on stock performance is, in our view, forcing brick-and-mortar competitors toward managing more irrationally for short-term performance just when they’re confronting secular change.”

He makes sure to point out that many people are making the mistake of perceiving Amazon’s new joint venture puts them in a position to take over the grovery business. But O’Shea advises quite the opposite. He says, “Online sales still account for only about 10% of overall U.S. retail sales, with a much lower percentage in the grocery segment, leaving the big brick-and-mortar retailers, led by Walmart, still really formidable competitors in the industry.”

The numbers back up his analysis: US food sales ring in at about $800 billion a year. Wal-Mart Stores (the biggest brick-and-mortar retailer) does about 25 percent of this business ($200 billion).

Kroger Co can manage about $130 billion a year while Safeway’s [new] parent company, Albertson’s, does about $60 billion in food sales annually. Costco sells roughly $50 billion.

O’Shea continues, “We believe it’s a big stretch to say Amazon will dominate the U.S. food retail business in the next two years. Even with Whole Foods in its basket, its food sales still amount to less than $20 billion annually.”
Indeed, O’Shea argues: “When it announced that it would enter services, we think it received way more attention than it deserved.”

O’Shea also estimates that Amazon Prime memberships (which will help keep grocery prices down in this new concept) have also been inflated. He posits that pundits have bet this figure could be as high as 85 million, but Amazon—while they have not provided an actual number—suggests this number is probably closer to, maybe, 20 million.

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