BEFORE WHOLE FOODS, DID AMAZON TARGET H-E-B?
Analysts say H-E-B, with large regional footprint, is an attractive target.
A former Amazon executive says the retail giant looked at San Antonio-based supermarket chain H-E-B before the online seller, instead, decided to buy Austin-based Whole Foods Market as part of its push into groceries.
Brittain Ladd — a former senior manager of strategy and expansion for Amazon’s Fresh and Pantry operations — suggested trying to buy the 391store H-E-B chain as an entry point into traditional brick-andmortar retail in a 2015 internal memo, he said.
While the conversations about H-E-B don’t appear to have gotten very far, Ladd and other industry analysts said H-E-B is an attractive target because of
Some lawmakers and union leaders are calling on federal regulators to halt or scrutinize the AmazonWhole Foods deal on antitrust grounds.
its large regional footprint in Texas and Mexico as well as its strong customer loyalty. Ladd placed a value of $13 billion on the family-run operation. Industry analysts said other retailers probably have H-E-B on their shopping list as well.
H-E-B’s limited reach would have allowed Amazon.com to implement a “crawl-walk-run” strategy when entering the food retail space, said Ladd, who now works as an industry consultant. That would have given Amazon time to learn how to operate H-EB’s physical grocery stores before expanding the company into other states.
The Charles Butt family, the 23rd wealthiest in the U.S., owns the chain. The privately held company sold an estimated $23 billion worth of goods in 2016 and was valued at $10.7 billion by Forbes earlier this year.
“H-E-B has proved that they’re highly capable of delivering a flawless grocery experience for customers which has resulted in H-E-B establishing themselves as the preeminent grocery retailer in Texas,” Ladd said in an interview. The supermarket chain, Ladd said, “has the potential to be expanded to other locations if the opportunity presented itself.”
It’s unclear how far Ladd’s suggestion went within Amazon. Ladd said he wasn’t privy to discussions within the company’s acquisition team so was unsure whether Amazon executives seriously considered pursuing the San Antonio-based company, or made a formal offer to buy the chain, when the e-commerce giant began perusing for brick-and-mortar grocers.
Amazon and H-E-B officials declined to say whether the two companies held any exploratory discussions. Amazon spokesman Aaron Toso confirmed that Ladd previously worked there as a senior manager for the company’s Fresh and Pantry operations.
In a written statement, H-E-B spokeswoman Dya Campos said, “H-E-B fully intends on remaining a proud Texas-based, independent and private company focused on serving our customers.”
Even Ladd was doubtful the Butts would consider selling the company their family founded in 1905.
“They have such a love affair with the company, they have such a love affair with the associates,” Ladd said. “I just don’t know if they would ever sell to anyone.”
But H-E-B wasn’t at the top of Ladd’s list, he said. That spot belonged to Whole Foods. The reason? Whole Foods has a nationwide footprint of about 440 stores, while H-E-B’s presence is limited to Texas and Mexico, Ladd said.
H-E-B is “very strong regionally,” said Phil Lempert, a food industry analyst with SupermarketGuru. com, but Amazon would have to find other strong regional grocers to fill out its national portfolio.
“It’s not about one acquisition,” said Lempert, who agreed that H-E-B would be an attractive target for anyone in the industry. “It’s probably about 10 acquisitions.”
The Whole Foods buy works out for both companies, analysts said.
Amazon gets a beefed-up distribution network that puts them within 10 miles of about 90 percent of their Prime subscription customers, Lempert said. The merger also pairs Amazon CEO Jeff Bezos’ ambitions to expand into food retail with the company’s forays into brick-and-mortar stores — a sign that physical locations are still necessary to compete in retail.
“If you want to fish where the fish are, the fish are still swimming in brickand-mortar when it comes to grocery,” said Darren Seiffer, a food consumption analyst for the New Yorkbased NPD Group.
Whole Foods, in turn, gets to breathe a sigh of relief, Lempert said. Whole Foods has struggled to keep other grocers like Sprouts Farmers Market and Natural Grocers off its organic turf and fend off traditional grocers such as H-E-B, Walmart and Target that are increasingly offering their own organic products.
The Austin-based organic grocery chain reported seven straight quarters of falling same-store sales, a key metric in retail performance, before activist investors pushed it to a sale.
“H-E-B doesn’t need anybody to bail them out the way Whole Foods did,” Lempert said.
The Amazon-Whole Foods merger still has to clear regulatory hurdles. But some lawmakers and union leaders are calling on federal regulators to halt or scrutinize the deal on antitrust grounds. U.S. Sen. Cory Booker, D-New Jersey, he is “highly skeptical” of the planned merger and plans to send a letter to the Justice Department raising concerns.
U.S. Rep. David Cicilline, D-R.I., called on the chairmen of the House Judiciary Committee and a subcommittee dealing with antitrust law to hold hearings on the merger. And Marc Perrone, president of the United Food and Commercial Workers International Union, filed a complaint with the Federal Trade Commission.
If approved, the merger would give Whole Foods access to the coveted millennial consumer, Seiffer said. Whole Foods has sought to expand its consumer base to millennials with its 365 brand of stores, aimed at attracting younger and budget-conscious shoppers. And roughly 60 percent of millennials have purchased something on Amazon within the past year, Seiffer said.
But Amazon won’t have direct access to H-E-B’s loyal customer base, Ladd said. H-E-B — alongside Florida-based supermarket chain Publix and San Antonio financial services firm USAA — had the highest customer loyalty rating in a 2016 survey of 10,000 consumers done by the Massachusetts-based Temkin Group, a consulting firm that monitors customer experience.
“They understand the customer so well that they’ve been able to delight customers in Texas to the point where even a company like Walmart couldn’t really impact H-E-B,” Ladd said.