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Could Amazon-Whole Foods transform ‘makin’ groceries’?
How cutthroat can a highly competitive industry become when a powerful new rival steps in? Customers of a large retailer with local ties may begin to see an answer to that question in coming months.
For years after the 1980s startup of Whole Foods Market, retail analysts questioned whether a grocer that specialized in foods labeled “organic” and costing more than the average product sold in conventional supermarkets could succeed. Grocery stores, after all, have traditionally existed on a razor-thin profit margin, which made them reliant on their ability to achieve high-volume sales.
But decades later, the concept of shopping for “natural” foods grown or produced with few or no harmful additives had proven its staying power. As it turned out, a lot of people did want better food products, and Whole Foods was developing a loyal following.
Whole Foods Market was founded in Austin, Texas, but it established a New Orleans connection at a very early stage.
In 1980 – soon after Whole Foods Market started up in Texas – a New Orleans entrepreneur named Peter Roy acquired a struggling local co-op store that also was called Whole Foods. As he aimed to grow the business, he sought the help of Tulane University business professor John Elstrott to develop a business strategy. Elstrott became Roy’s first “outside” investor.
A short time later, as the Austin-based Whole Foods laid plans to expand outside of Texas, the little New Orleans co-op became its first acquisition target. The local store became the first non-Texas location of Whole Foods Market.
After the acquisition, Roy would go on to become president of Whole Foods Market for a period of time. Elstrott, meanwhile, became one of the first shareholders in what would become one of the most successful “green” grocers in the country.
Elstrott joined the Whole Foods Market’s board of directors in 1984 and 25 years later was elected chairman. During his years of leadership, the company expanded in three countries and grew to employ 87,000 people. It became the dominant player in a sector that had become a firmly established part of the grocery industry.
A Healthy Market
The first Whole Foods Market opened in Austin, Texas in 1980. In 1988, a small store on Esplanade Avenue in New Orleans became the first Whole Foods Market location outside of Texas.
Number of employees 87,000
Annual sales $15.8 billion
Number of stores worldwide 460
Chief Executive Officer John P. Mackey
Stock symbol WFM
Price on 8/25/17 $41.99
Market Capitalization $13.5 billion
Net income (2016) $507,000
But recent years have brought stiffer competition in the green grocery arena. New players have forced greater price and product competition, and Whole Foods found the going increasingly rough.
Last May, as Whole Foods Market’s sales continued a decline and its stock price languished far below its previous highs, Elstrott was forced to step down from the post he had held for eight years. What followed thereafter likely marked a big turning point in the company’s evolution.
Barely a month after Elstrott stepped down, a retailing behemoth swept in to take the reins at Whole Foods Market. Online retail giant Amazon announced it would buy the grocer for $13.4 billion.
Moody’s retail analyst Charlie O’Shea said the deal has the potential to be “transformative ... not just for food retail, but for retail in general.”
Amazon during the past decades has already drastically shaken up shoppers’ buying habits by offering an enormous range of products online, often at prices below what shoppers would pay for the exact same items in a brick-and-mortar store. The company’s efficient fulfillment operations and quick – often free – delivery, has won over buyers so successfully that some of the best-known retail stores in the country have suffered sales declines and face an uncertain future.
Bringing that model to the sale of groceries could, indeed, prove transformative. Amazon already offered grocery-delivery services in several markets at the time of its deal for Whole Foods, and the purchase of a grocery with the broad reach of Whole Foods paved the way for a big Amazon grocery expansion.
The “implications ripple far beyond the food segment, where dominant players like Walmart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks,” O’Shea told an Associated Press reporter.
Online delivery of groceries has developed slowly due to customers’ concerns about the quality of items such as meat and produce, but if Amazon is able to demonstrate that it can deliver the same quality and freshness available from a store, shoppers are more likely to try it out, analysts say. And the impact on traditional grocers could be significant.
If, for instance, Amazon can convince 20 million members of its Prime loyalty program to pay $15 a month extra for AmazonFresh grocery-delivery service, that’s 20 million shoppers not going to traditional supermarkets, one analyst pointed out.
In August, Amazon began experimenting with deep price cuts in Whole Foods stores as it planned what is likely to be a big rollout of heavily discounted online grocery shopping down the road. “The conventional grocery store should feel threatened and incapable of responding,” Wedbush Securities analyst Michael Pachter said.
The process of “makin’ groceries” has turned a big corner.