As Amazon’s acquisition of Whole Foods Market is about to be finalised this week, Amazon announced that its first order of business would be to reduce prices at Whole Foods’ stores. Amazon will also begin selling Whole Foods’ brands on its online site, install Amazon pickup lockers in some locations and integrate its Amazon Prime program.
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This triggered a sell-off in bricks and mortar retailers such as Walmart and Kroger as investors worried about price wars and ongoing food price deflation. Suppliers such as Ahold Delhaize, Hain Celestial and United Natural Foods also sold off on similar concerns that Amazon’s size and market power would reduce suppliers’ margins and wholesale prices. Amazon also announced that it would reduce prices in its U.K. stores causing grocers in the U.K. and Europe to also fall.
Such is the market dominance of Amazon, where investors have allowed the company to sacrifice profitability in return for top-line revenue and market share growth. Having earnt the faith of growth investors over the last decade, Amazon is in a unique position to change the landscape of the U.S. grocery market. By combining its financial strength with its technological edge, Amazon hopes to expand its product offering to its growing base of Amazon Prime members, which is at 85 million members and counting.
From an Australian perspective, we are certainly still a while away from a full Amazon launch locally but observing Amazon’s impact on the U.S. grocery market is likely to provide a window on the impact on Australian grocers and retailers. In short, if growth and capturing market share continues to be Amazon’s primary focus, we will likely see price deflation in Australia. This would be a boon for consumers (along with added convenience through Amazon’s online offering) but is also likely to be very negative for Australian retail businesses.