The online store that irrevocably disrupted the publishing industry is now threatening to reshape retail entirely. Amazon has been delving into brick-and-mortar grocery stores for some time now. Last December, they unveiled Amazon Go: brick-and-mortar convenience/grocery stores where purchases are tracked via smartphone. Then last week, Amazon announced their plans to buy upscale grocery store Whole Foods at $42 a share. The retail industry has been reeling ever since.
What the Merger Means for the Grocery Industry
Amazon is poised to take over retail in its entirety, but the effect of this acquisition on the grocery business alone is monumental. The merger has the potential for very positive or very negative results. Because of Amazon’s massive regional distribution centers, they would be able to cut out wholesalers and take the products directly from the distribution centers to the consumers. Amazon could apply their advanced computer systems to the complex food distribution system. They would establish direct relationships with farmers, cutting out the middleman. The improved efficiency working with perishable products would lead to greater food quantity at lower prices.
Merging with Whole Foods also gives Amazon the ability to cater to two specific types of shopping experiences. Whole Foods offers a more intimate shopping experience than chains like Walmart or Target, and the lucrative market of Millennials largely prefers online shopping. Despite the popularity of home delivery, even some Millennials prefer a brick-and-mortar experience when it comes to choosing fresh meat and produce. Amazon would be able to capitalize on two trending markets.
Job Loss vs Job Creation
So far, it seems as though the merger will be a win for everyone, but a controversial aspect centers around jobs. Amazon fulfillment centers are labor-intensive operations and will require an expanded workforce to handle food. The company issued a statement saying they will create more than 100,000 new, full-time, full-benefit jobs across the U.S. over the next 18 months. These jobs will be for all experience, education, and skill levels; from engineers and software developers to entry-level jobs.
On the other hand, grocery stores are labor intensive businesses in themselves, and with Amazon’s streamlined distribution model, much of that labor is eliminated. Nearly 3 million are employed by the grocery industry. Amazon, however, claims that the technology of Amazon Go will not be applied to Whole Foods and that there are no planned job reductions. Grocery home-delivery remains economically problematic. The desire for a personal experience, wariness over someone else picking your produce, and the extra money a consumer would have to pay to make grocery home-delivery viable are all factors that have limited the expansion of services such as AmazonFresh and Instacart.
The Competitors
The merger is not yet set in stone. In fact, many predict that a bidding war may come from Amazon’s offer. The stocks of Kroger, Walmart, Target, Sprouts, and other competing stores dropped significantly after Amazon’s announcement. Kroger dropped nearly 11 percent, Costco dropped 5.8 percent, and Sprouts dropped 5.2 percent. Yet, some are backing Kroger as a potential contender for the Whole Foods bid. Amazon offered Whole Foods $42 a share; Kroger could pay $50 a share without affecting earnings. And holding the biggest share of the grocery market at 14.5 percent of grocery sales, Walmart doesn’t appear to be under any immediate threat.
Though Whole Foods CEO, John Mackey, gushes that the merger is “love at first sight,” whether the $13.7 billion deal comes to pass remains to be seen. If it does come to pass, what will it mean for the grocery industry and what must competitors do to stay in the competition? Will Amazon’s streamlined vision for grocery shopping lead to more desperately-needed jobs, or will all of the middleman cutting result in disaster?
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