AMZN Amazon.com Inc

By Heather Haddon 

Amazon.com Inc.'s year-old acquisition of Whole Foods is prompting the food industry to retool how it sells fresh food to consumers.

The e-commerce giant agreed to buy Whole Foods Market Inc. last June for roughly $13.5 billion and closed the deal in August. Since then, Amazon has rolled out additional deals and delivery to Prime members. Companies, investors and analysts expect more changes as Amazon uses data capabilities to track what shoppers buy at the grocery chain and market to them.

The deal has been "shaking up the food industry from top to bottom," said Angela Spivey, a food-and-beverage attorney at McGuireWoods LLP, who is advising clients on how to quickly change their packaging and marketing to sell at Amazon and Whole Foods. "Don't be surprised if the milk and cereal just shows up at your door based on your usual eating habits."

Food retailers, manufacturers and other suppliers have begun to make fundamental changes to their selling strategies, driven partly by stronger sales and delivery from Whole Foods stores since the acquisition.

Whole Foods' foot traffic has increased roughly 3% year over year in each of the quarters since Amazon bought the chain, according to an analysis by Thasos Group, which uses mobile-phone location data to determine trends. That reversed two straight years of stagnating sales at the chain before the deal. Of 11 supermarkets analyzed by Thasos, Trader Joe's and Sprouts customers were most eager to try out Whole Foods after the acquisition to check out subsequent price cuts, with 8% of their regular shoppers visiting the rival chain.

A Sprouts spokeswoman said traffic was up at the Phoenix chain in its most recent quarter and that the brand "continues to resonate." A Trader Joe's spokeswoman said sales were strong and its products are in demand. Spokeswomen for Amazon and Whole Foods declined to comment.

Grocery chains have invested in online delivery and pickup services, in some cases bumping plans ahead to two- to three-year timelines instead of five to seven years, according to Steve Caine, a Bain & Co. partner who consults with grocers on their online strategies.

Dozens of supermarkets have struck deals with Instacart Inc., an online grocery delivery service that has expanded to more than 200 retailers from 30 before Amazon's deal. Kroger Co., Walmart Inc. and Target Stores Inc. have all made e-commerce acquisitions, with more technology investment expected. Those chains have slowed store growth to deploy millions of dollars of capital for technology.

"We are continuing to look across the U.S. and the world for potential partnerships," Kroger chief executive Rodney McMullen said in an interview after the company said it would take a $250 million stake in British online grocer Ocado Group PLC last month.

Whole Foods remains a small part of the roughly $800 billion U.S. food retail market, with less than one-fifth the number of stores of Kroger, the nation's largest grocer. Executives at Kroger and other large conventional chains say they haven't seen a big drop in sales in the past year because they cater to mainstream shoppers and have little overlap with Whole Foods, whose average customer household income exceeds $70,000, according to market research.

After Amazon extended discounts at Whole Foods to Prime members -- which will help it gather data about shoppers' preferences -- analysts said competitors might need to update their own shopper-loyalty programs. Amazon now offers free, two-hour delivery and additional 10% discounts on several hundred items for Prime members in select areas.

Many food makers are redesigning their packaging and formulas to better sell through Amazon and Whole Foods, placing an emphasis on online repeat purchases instead of impulse buys, industry consultants said.

Meanwhile, Whole Foods's main distributor, United Natural Foods Inc., has seen a flood of business in the past year as net sales at the Providence, R.I., company jumped 12% for its most recent financial period that ended in April. Business to the Whole Foods sector alone was up by 24%.

United Natural reported nearly $1 billion in sales to Whole Foods in the quarter that ended in April, up from about $800 million in the year-earlier period, before the deal.

But United Natural has struggled to keep goods in stock, resulting in millions of dollars in lost sales and sudden expenses for unforeseen storage and staffing needs. On Thursday, its shares fell almost 15%, the largest drop in more than two years, after announcing its third-quarter earnings.

Amazon's formula for attracting customers to Whole Foods was simple. After the deal closed, the online retailer slashed prices on avocados, bananas and other items at Whole Foods's 460 U.S. stores, attracting waves of shoppers. That strategy has helped drive year-over-year sales growth of grocery goods and health products by the greatest levels in seven years, according to financial filings by United Natural.

"I do find myself going there more often," said Theresa Bond, a 46-year-old librarian in Bridgewater, N.J., who said she has noticed less expensive prices on crackers, tortillas and tea at Whole Foods stores.

Pricing surveys show Whole Foods' prices still average higher than many competitors, but they have come down. The chain has focused on getting competitive on staples, said Guillaume Bacuvier, chief executive of Dunnhumby, an international retail consulting and technology firm that Whole Foods hired to help improve consumer analytics.

Retailers haven't been surprised by Amazon's moves, Bain's Mr. Caine said. But "it's this anticipation of what may come next that has turned up the heat on everyone."

--Laura Stevens contributed to this article.

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

June 10, 2018 07:14 ET (11:14 GMT)

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