By Heather Haddon
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 11, 2018).
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 came after two straight
years of stagnating sales at the chain before the deal. Higher foot
traffic improves a retailer's likelihood of sales, and the figure
can be a used as a proxy for a chain's health. Of 11 supermarkets
analyzed by Thasos, Trader Joe's and Sprouts customers were most
eager to try out Whole Foods after the acquisition to potentially
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 accelerated planned investments 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 stepped up 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' main distributor, United Natural Foods
Inc., has experienced a flood of business in the past year as net
sales at the Providence, R.I., company jumped 12% for its most
recent quarter, ended in April. Business to the Whole Foods sector
alone rose 24%.
United Natural reported nearly $1 billion in sales to Whole
Foods for the April quarter, 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 14%, the largest drop in more than two years, after the
company posted its third-quarter earnings. The stock added 27 cents
to close at $39.85 on Friday.
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' 460 U.S.
stores, attracting waves of shoppers. That formula has helped drive
year-over-year sales growth of grocery goods and health products
sold by the distributor by the greatest levels in seven years,
according to financial filings by United Natural.
United Natural supplies the bulk of Whole Foods' shelf-stable
and consumer products, but not fresh food. Whole Foods no longer
discloses its standalone sales figures since the acquisition, but
its last financial filing, which included partial Amazon ownership,
showed that between July and September 2017, sales rose 4% to $3.7
billion from the year-earlier period.
"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 11, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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