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June 19, 2017

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Amazon on collision course with Wal-Mart

WHEN Wal-Mart Stores Inc bought online retailer for US$3 billion last year, it marked a crucial moment — the world’s largest bricks-and-mortar retailer, after years of ceding e-commerce leadership to arch rival Amazon, intended to compete.

On Friday, Inc countered. With its US$14 billion purchase of grocery chain Whole Foods Market Inc, the US largest e-commerce company announced its intention to take on Wal-Mart in the bricks-and-mortar world.

The two deals make it clear that the lines that divided traditional retail from e-commerce are disappearing, and sector dominance will no longer be bound by e-commerce or bricks-and-mortar, but by who is better at both.

Amazon’s purchase of Whole Foods also brings disruption to the US$700 billion US grocery sector, a traditional area of retailing that stands on the precipice of a ferocious price war. German discounters Aldi and Lidl are battling Wal-Mart, which controls 22 percent of the US grocery market, with each vowing to undercut whatever price the others offer.

The stakes are highest for Wal-Mart. Amazon’s move aims at the heart of the Bentonville, Arkansas-based retail giant’s business — groceries, which account for 56 percent of Wal-Mart’s US$486 billion in revenue for the year ending on January 31. With the deal, Whole Foods’ more than 460 stores become a test bed with which Amazon can learn how to compete with Wal-Mart’s 4,700 stores with a large grocery offering that are also within 16 kilometers of 90 percent of the US population.

Amazon is expected to lower Whole Foods’ prices, enabling it to pursue Wal-Mart’s customers. The push comes as Wal-Mart is headed in the opposite direction — going after Amazon’s higher-income shoppers with a recent string of acquisitions of online brands such as Moosejaw and Modcloth.

Wal-Mart may be ready. In preparation for the grocery price war, Wal-Mart in recent months has cut grocery prices, improved fresh food and meat offerings, modernized shelving and lighting in its grocery aisles, and expanded its online grocery pickup service.

Marc Lore, the founder who now runs Wal-Mart’s e-commerce business after selling a startup to Amazon, said Amazon’s move does not change Wal-Mart’s game plan. “We’re playing offense,” he said.

Wal-Mart is offering curbside pickup of online grocery purchases at 700 locations, with 300 more planned by year end. It also is testing same-day fresh and frozen home delivery from 10 of its stores. “We see an opportunity to do a lot more of that,” Lore said.

Roger Davidson, who oversaw Wal-Mart’s global food procurement and now is president of Oakton Advisory Group, said the deal will reduce Wal-Mart’s bricks-and-mortar advantage.

Some industry observers say Amazon will find it difficult to use Whole Foods to pull away Wal-Mart shoppers because the two stores appeal to different customers.


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