Walmart should still terrify Amazon and Whole Foods

Grocery store war comes in Southwest Florida

Now the deal will likely quicken those efforts.

The push to modernize grocery stores is under even more pressure following Amazon's agreement to buy Whole Foods Market Inc. for $13.7 billion last week. Today an Amazon Prime subscription gives you access to television programmes alongside next-day delivery for your shopping. They may also need to seek innovative partners of their own.

Supermarket chains face high fixed costs in their offline divisions (real estate, supplies, staff, ...) and their small margins leave very little room for innovative technology investments.

Kroger Co., for instance, has touted the opening of Murray's cheese shops in some locations.

"We don't know what Amazon's strategy will be with Whole Foods, and it may ultimately not be effective", wrote Vic Lassandro, senior portfolio manager for RiverPoint.

Leonard noted his chain is known for free samples and costumed farm animals that walk around stores and greet shoppers. Meanwhile, entrenched chains like Wal-Mart, Costco, and Target continue to add new stores, and meal-kit concepts like Blue Apron (NYSE: APRN) have popped up, taking billions of dollars in sales from traditional grocery stores. Fresh and prepared foods are the challenge. Similarly, Whole Foods acts as a curator for shoppers by banning ingredients like saccharin and bleached flour from the products it sells.

China's Alibaba Group Holding and Inc have invested heavily in offline retail - bricks-and-mortar stores - in recent years to complement their online offerings.

Grocery stores will have to find ways to leverage the vast amounts of data that customers produce and use it in a way that makes shopping more convenient and less of a burden.

Maintaining the right balance will be critical.

Investors should note that a Walmart play for Whole Foods is speculation at this point, and rumors like this are standard after big mergers are announced. Kroger has almost 2,800 stores that operate under a variety of names. "They buy larger pack sizes, demand larger sizes and are highly repetitive in terms of what they buy as menu inertia is true for most independent restaurants".

"Publix can sit back and watch other competitors get bigger by buying subpar grocers and going further into debt by doing it", he said.

Amazon's deal is expected to go through in the second half of this year, provided a counter offer doesn't emerge. By comparison, about one-fifth of all electronics and appliances sales in 2015 were online, according to the report, totaling more than $20 billion that year.

But Walmart is opening new stores while other retailers are shrinking, and Moody's expects its food business to "accelerate at a rapid pace, with buy-online/pick-up-in-store its latest weapon". This acquisition propels Amazon into the largest retail market for sure.

In reviewing this acquisition more closely, I see an admission from Amazon, and a few reasons why I believe this deal will have minimal impact on most grocery stores in the immediate future.

The rest of the $800 billion grocery industry has been slower to modernize.

Amazon's wide-ranging data collection and sophisticated analysis helps it set prices and decide what offers to present to different customers.

The combination of the world's foremost e-commerce business with the most respected brand in organic and natural groceries creates a threat unlike one the industry has ever seen, but even before that news broke the sector was already struggling. Smaller regional players that don't have the resources to compete would be at a big disadvantage. This exuberance was not shared by other grocers, such as Kroger, Target, Costco and Walmart. Deep discounter Aldi has been expanding and its German rival Lidl opened its first USA stores this month. The chain known for rock-bottom prices is expected to pressure Wal-Mart, having leveled its Asda subsidiary in the United Kingdom, and also dollar-store chains.

While online sales now account for just a couple of percentage points of total grocery sales, Amazon's entry into the marketplace will likely accelerate the trend industrywide.

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