Retail

Amazon could buy up an Australian supermarket chain following Whole Foods deal, says expert

Emma Koehn /

News of Amazon’s purchase of US supermarket chain Whole Foods for $US13.7 billion ($17.9 billion) has sent global retailers into a spin, but closer to home, one expert says the deal could have a longer term impact on the supermarket wars.

The deal raises the prospect of Amazon potentially acquiring an existing distribution network from one of the independent players in Australia’s grocery market, says Gary Mortimer, a retail expert and associate professor at Queensland University of Technology.

At the end of last week Amazon dropped news of its first significant foray into the world of bricks-and-mortar, telling the US market the merger of the two companies will involve Amazon acquiring the Texas-based Whole Foods, which has more than 400 locations across the country, at $US42 a share.

The announcement prompted North American retail analysts to launch into doomsday predictions for other fresh food and supermarket competitors across the country; an analyst from DJL Research told Forbes US competitors to Whole Foods, like Natural Grocers and The Fresh Market, are “totally screwed”.

Closer to home, some Australian retail heavyweights have kept up the optimism even with news that the global retailer has pivoted into bricks-and-mortar grocery so soon before its launch into the Australian market, with the likes of Gerry Harvey telling Fairfax this morning he believes Amazon will still face tougher conditions here than anticipated.

But does the acquisition mean Australia might eventually see local Whole Foods outlets, and in turn, a new entrant to the supermarket wars?

Mortimer thinks it’s unlikely, but he says retailers should not underestimate the power of this decision to significantly shift the criteria that supermarkets compete on in future.

“You might see Amazon follow a similar strategy in Australia in order to get into bricks-and-mortar,” Mortimer suggests. 

While the big two supermarkets may be able to fend off Amazon’s advances, Amazon could have its eye on the country’s smaller independent grocery market.

I suspect they won’t touch Woolies and Coles, because they won’t let them in, but certainly something like Metcash, where they have a pretty strong distribution,” says Mortimer.  

Amazon is not buying the Whole Foods brands as much as it is buying its distribution networks, Mortimer says, and a similar strategy in Australia could see the supermarkets shift from a sustained period of price competition to a new frontier of competition on delivery.

“They’re basically buying the facilities and the real estate. In future, this may even facilitate something like five-minute delivery. The thing will be that everyone can offer an online platform, but the winner will be the one that gets it to the customer quickest,” Mortimer says.

Industry analysis of the company’s supermarket sector highlights there is potential for the supermarkets to be shaken up by a growth in online deliveries, given the space has been in a race to the bottom for so long on price.

In its April sector overview of Australia’s supermarkets and grocery stores, IBISWorld suggests industry revenue growth in the $105 billion sector is likely to be constrained over the next five years as the sector continues to pump out more private label products in a race to the bottom on basket prices.

While the supermarket revenue growth is expected to continue at 2.2% up to 2022, IBISWorld analysts say ever since the introduction of Aldi to the Australian market, the entire sector is trying to get ahead on price alone, even though “supply chain prices have little room left to move”.

Mortimer thinks the focus on prices will shift in coming years, particularly if Amazon buys into bricks-and-mortar logistics assets in Australia.

“It will move from price wars to time wars. If Amazon can win on price, they will, but it will be about getting things to the customer the fastest,” he says.

While there’s been plenty of commentary from the heads of major retailers about Amazon’s arrival in Australia, questions also remain over whether smaller retailers and suppliers are innovating fast enough to meet the challenges of the new landscape.

The Commonwealth Bank’s Retail Innovation Report card for 2017, which is based on surveys of over 2500 Australian retailers, revealed in March that at that time, only 30% of retailers were even aware of the potential that Amazon would enter the Australian market, while 14% cited a plan to face this reality.

Discussing these figures, the CBA’s national retail manager Jerry Macey says speed of delivery will play a role in future retail competition for businesses of all sizes, and Amazon can afford to absorb some missteps initially.

“The reality is most retailers can’t effectively compete with Amazon on factors like delivery times and pricing, particularly when Amazon can sustain losses in the short term,” Macey said in March.

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Emma Koehn

Emma Koehn is SmartCompany's senior journalist.

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  • Nexusfast123

    Would not shop at any outlet associated with Amazon.

  • adam watt

    I would , Australians get ripped off terribly by Australian retailers, and then there’s the appalling service can’t wait .