Online retailer Amazon’s move to snap up the American grocery chain Whole Foods put a chill through Australian supermarkets on Monday, with the market reacting to news the e-commerce giant was putting kitchen cupboards at the centre of its future.
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The $USUS13.7 billion ($18 billion) investment, announced on Saturday, will see Amazon acquire 460 stores across 42 US states, which will serve as distribution and pick-up locations.
Woolworths, Coles’ owner Wesfarmers and independent wholesaler Metcash were all sold down on Monday, the first day of trading on the ASX since Amazon said it would buy Whole Foods.
Amazon is setting up infrastructure for a full retail offering in Australia, which could be operational as early as next year and include it’s grocery delivery business Amazon Fresh.
“You’re starting to see a bit of an impact on share prices of groceries being front and centre in Amazon’s planning,” said Citi analyst Bryan Raymond.
“The share price response you’ve seen today reflects that there’s been limited risk priced into Woolworths and Wesfarmers compared to what there has been for other stocks.”
Mr Raymond said Amazon buying Whole Foods was an acknowledgement that pure-play online grocery retailing was challenging, and that customers ultimately wanted bricks and mortar stores from grocery retailers.
Amazon will acquire 460 stores through the $18 billion investment. Photo: Eric Gay
However, he said it was unlikely Amazon would buy one of the major Australian supermarkets.
The Whole Foods investment was small relative to the market’s size, being equivalent to a 34-store chain with $1.4 billion turnover in Australia. That is about half the size of the Richies IGA chain and a quarter the size of Foodland in South Australia, he said.
“We certainly don’t think a bid for Woolworths or Coles would be likely,” Mr Raymond said. “It’s more likely to be a relatively small acquisition of a small network over time.”
Wholesaler Metcash was an unlikely target because it mostly offered products and supply chain logistics – things Amazon already excelled at.
In Britain, Amazon Fresh has teamed up with supermarket chain Morrisons to supply fresh and frozen foods.
“They don’t need distribution centres, they don’t need range… what they need is retail touch points,” he said.
Mr Raymond said Amazon Fresh was primarily attractive because it was convenient, not cheaper than supermarkets, meaning the risk to Australian supermarkets was mostly around losing sales volume rather having profits slashed in a price war.
“Our view is grocery is less exposed to Amazon than electronics and other discretionary categories given the importance of a bricks and mortar network, which obviously Woolworths and Coles have a pretty good market position in,” Mr Raymond said.
“That’s not to say Coles and Woolworths are totally immune because their online offers are not where they should be.”
Amazon is hunting for real estate to set up distribution centres across Australia and is expected to secure at least four large warehouses and a few smaller properties.
Woolworths closed the day down 3.5 per cent, while Wesfarmers was 0.2 per cent lower. Metcash fell 2.3 per cent.