Rohit Anand – Atlanta area retailers brace for Amazon-Whole Foods fallout

The Atlanta Journal-Constitution

June 22, 2017

Amazon’s $13.7 billion deal to buy high-end grocer Whole Foods Market sent shockwaves through the retail universe. Given Amazon’s history of disruption, experts say, the blockbuster transaction over time could influence the way consumers in Atlanta and elsewhere buy meats, veggies and dry goods, whether they shop at a Whole Foods or not.

There are still plenty of unknowns about how Amazon plans to merge the Whole Foods mainline brand and the company’s middle-tier chain of stores known as 365 into its broader e-commerce empire.

But the acquisition signals that Amazon knows it needs physical stores to make it in the grocery business, and industry observers say it’s a sign Amazon will expand the Whole Foods chain and possibly look at other acquisitions. Rivals, meanwhile, will be watching Amazon’s every move.

Grocery-anchored retail centers became one of the hottest areas of real estate development and investment in the wake of the recession, with the thought that the grocery segment was immune to the pressures of e-commerce giants like Amazon.

But more competitors — whether brick and mortar stores or online — will only increase the pressure on stores to differentiate themselves and make a profit.

“Every grocer is having to step up their game from all the new competitors,” Melina Cordero, head of retail research in the Americas for CBRE Research told journalists at the National Association of Real Estate Editors conference in Denver earlier this month.

Mark Toro, managing partner for developer North American Properties in Atlanta, called the Whole Foods deal “a validation of bricks and mortar retail.”

In Whole Foods, Amazon gets a “last-mile” distribution channel it doesn’t have, and could be a sign of future retail acquisitions to come, Toro said.

The Whole Foods deal and moves by Walmart, which previously acquired Amazon competitor and this month announced a deal for online menswear brand Bonobos, show that the future of retail is “omnichannel,” or a blend of the physical store and online, Toro said.

Toro’s firm developed the Avalon mixed-use community in Alpharetta, which includes a Whole Foods. He said he expects Amazon will eventually reconfigure Whole Foods stores, and landlords and developers will have to adapt.

“Everybody is perfecting their omnichannel platforms and the winners are going to be the ones who provide an experience on their property and can still serve their customers on the web,” Toro said.

Like Walmart, Amazon is a master of wringing out costs. The company is likely to squeeze makers of packaged goods — from canned soup to cleaning products — to help make lower prices part of their competitive edge.

Shares of Kroger and other grocers slumped on the initial Whole Foods news, as did the stock prices of many real estate investment trusts that own grocery-anchored shopping centers.

“If I were them, I would certainly be scared right now,” said Jared Wiesel, a partner in the retail and consumer goods practice at Revenue Analytics. “Wall Street’s reaction is certainly telling that story.”

Amazon’s history is to enter a segment and redefine it, Wiesel said.

“There could be a lot of that market up for grabs with a better experience and value,” he said.

Razor thin margins

The grocery segment features razor thin margins and lots of competition. German low-cost rivals such as Aldi and Lidl have started to challenge established incumbents in metro Atlanta such as Publix, Kroger, Walmart and Target.

Trader Joe’s and specialty grocers such as Sprouts Farmers Market, Fresh Market, Earth Fare and, of course, Whole Foods, also have made aggressive pushes into the metro market. Whole Foods recently launched its 365 chain with several planned in the Atlanta area — to compete with middle-tier grocers slicing into its niche of higher margin organic and free-range products.

Meanwhile, drug store chains also have added more grocery items in recent years to attract grab-and-go shoppers.

Rohit Anand, a principal at KTGY Architecture + Planning, said Amazon’s bet on brick and mortar retail speaks to the company’s belief it can blend what it offers online with the high-touch service of a Whole Food grocery store for an overall shopping experience that doesn’t presently exist.

He said Amazon is “looking to control the end-to-end customer experience.”

Appliances and electronics make up the largest segment of e-commerce sales as a total of all retail sales, followed by clothing and apparel. But grocers have had little to fear from the rise of online retail.

According to a report this month by CBRE Research, online food and beverage sales — of which groceries are the biggest part — made up only 0.1 percent of all retail sales or about $1 billion in 2015. 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.

“Pure internet grocery sales are likely to remain limited given supply chain challenges, cost and consumer preferences, but blended subscription and click-and-collect models will likely grow,” a second CBRE report this month said.

Omnichannel dominance will require physical stores, CBRE said, “giving the initial advantage to those players with a wide existing store network.”

Whole Foods itself isn’t that big, with fewer than 500 stores nationwide. Kroger, by contrast has nearly 2,800 across its U.S. brands. Walmart, the nation’s biggest grocer, reported about $200 billion in grocery sales in 2016, or nearly one-third of all grocery sales revenue, compared to $15.7 billion for Whole Foods, CBRE says.

Customers still like to pick out their own meats and produce, and that isn’t likely to change all that much, at least not yet. Meal delivery and grocery delivery works best in densely populated areas, and the supply chains for food delivery are quite expensive.

Amazon will also be competing with regional chains that have partnered with online delivery services such as Instacart, or started their own online and pickup services such as Kroger’s ClickList.

Wiesel said Amazon has been trying to crack the grocery code for years with only varied success.

Amazon has become a ubiquitous player in e-commerce, and about half of American households reportedly have memberships to its Prime service package.

“No one knows more about their customers than Amazon,” Wiesel said, and with Whole Foods they’ll know what you pick up at the supermarket.

Testing Amazon Go

So what would a future grocery store look like?

Amazon recently unveiled its Amazon Go concept that doesn’t require a cashiers or checkouts. So far, it’s in the testing phase in Seattle and only available to employees. Customers just pick up what they want and walk out with sensors detecting the items. It’s all linked by a smartphone app.

That store, which is smaller than most suburban homes, features grab-and-go meals, snacks, bread, milk and other staples.

An Amazon representative said “Amazon has no plans to use the technology it developed for Amazon Go to automate the jobs of cashiers at Whole Foods,” and no job cuts are planned as part of the Whole Food acquisition.

But an Amazon-Whole Foods marriage will likely produce other concepts, said David Kitchens, a principal at architecture firm Cooper Carry.

Kitchens expects store footprints to get smaller. Competitors such as Aldi and Lidl operate stores at a fraction of the size of many big boxes.

Amazon’s delivery system, coupled with the rise of the smart home and smart appliances, could push more shoppers to use routine delivery of staples, cutting down on products Whole Foods and 365 need to carry.

Space saved could be devoted to specialty goods and prepared meals popular with millennial shoppers. Shrinking shelf space also would give Amazon leverage to squeeze vendors, Kitchens said, which could result in lower prices.

A move to smaller stores, Kitchens said, could lead to store formats that fit in more places, especially densely populated urban areas.

“To me this is yet another layer of experiential retail that can go anywhere,” he said.