It’s good news for bricks-and-mortar retail, but rivals will need to step up e-commerce adoption. The news earlier this month that US e-commerce giant Amazon is acquiring Whole Foods for $13.4 bn (€11.9 bn) sparked a chorus of enthusiastic reactions from real estate advisory firms.
The news earlier this month that US e-commerce giant Amazon is acquiring Whole Foods for $13.4 bn (€11.9 bn) sparked a chorus of enthusiastic reactions from real estate advisory firms.
According to Larry Brennan, head of European retail agency at Savills, the acquisition further underlines the importance for online retailers to have a physical presence, a sentiment that is echoed by many of his peers. ‘No doubt some will see the buyout of a major retail chain by the world’s largest e-tailer as another nail in the coffin for the high street. In reality, nothing could be further from the truth,’ says Darren Yates, head of EMEA Retail Research & Insight at Cushman & Wakefield.
The fact that Amazon is prepared to spend £10 bn on Whole Foods demonstrates how e-tailers are fully aware of the need for physical distribution spaces close to their customers, especially when it comes to grocery sales, Yates argues. ‘The traditional retail model is certainly undergoing a revolution, but physical products will always need physical space and, in many cases, a space to display them.’
Amazon has been seeking a greater presence in the bricks-and-mortar sector for some time, James Brown, international director, research and strategy, at JLL points out. ‘It was a question of when, not if, it would make a move in this space. This deal shows that it is committed to bricks-and-mortar retailing and that a leading, former pure-play e-commerce player sees the benefits of having physical space. The future of retail is a seamless fit between the physical and the virtual world.’
New level
Founded in 1978 in Austin, Texas, Whole Foods is best known for its organic foods and fresh, local produce and meats. The addition of the upscale grocery chain takes Amazon’s physical presence in the retail sector to a new level: Whole Foods has more than 450 stores in the US, Canada and the UK with sales of $16 bn.
No wonder then that industry analysts view the deal with Amazon as a ‘seismic’ event for the sector. ‘The retail sector is used to change, but every so often an event occurs that shakes the industry to its core,’ says Neil Saunders, managing director of research firm GlobalData Retail. ‘Amazon’s acquisition of Whole Foods is one of those.’
While a marriage between Amazon and Whole Foods is expected to give the retail real estate sector a welcome lift, it will be challenging for legacy grocers. Indeed, the share prices of a number of large retailers across the world slumped following the news of the deal. Whole Foods surged 28% on the news, but the largest US grocery retailer, Wal-Mart, shed 6.2% while in Europe Dutch supermarket giant Ahold Delaize tumbled 10%.
The tie-up with Whole Foods has shifted the dial, JLL’s Brown confirms. ‘It will put pressure on existing grocery stores and accelerate the investment and adoption of e-commerce in the grocery sector. Grocery retailers will have to respond to the disruption. The industry cannot be complacent.’
More M&A activity
In that sense, a deal with Amazon would be a wake-up call, Brown says. ‘If the grocery industry continues to proceed at a pace of gradual change, there is a danger that it will fall asleep at the wheel. In a way, this deal feels like something coming from behind that is moving with pace; it will force the industry to focus more on innovation. Arguably there hasn’t been enough change and growth so far and we may well see some more bold moves in the period ahead. We may see more M&A activity or more partnerships because the industry will have to move quicker to keep up.’
There is still a chance that Wal-Mart will make a counterbid for the US organic food retailer and that a bidding war could erupt, Brown says. In either case, the deal is good news for consumers, he adds. ‘A tie-up with either Amazon or Wal-Mart would give Whole Foods more clout to negotiate with its suppliers and to offer a better range and value proposition to its customers. Prices will fall as a result.’
A tie-up between Amazon and Whole Foods is particularly exciting, says Brown: ‘There would be real innovation in that marriage.’
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This analysis appeared earlier in EuroProperty, the weekly publication of the PropertyEU Group.
