Amazon ramps up grocery wars as it buys £11bn chain
£11bn bid for upmarket food chain spooks rivals
AMAZON is set to go head to head with Britain’s biggest supermarkets after buying an upmarket grocery chain specialising in organic food.
The web giant, which is 14 times larger than Tesco, Sainsbury’s and Morrisons combined, has agreed a £10.7billion deal for Whole Foods.
Experts have hailed the move as a potential game-changer. One analyst said Amazon could even ‘knock Tesco off its perch as Britain’s top supermarket’ as part of a dramatic upheaval in UK shopping habits.
The tech firm has long been planning a raid on the grocery sector and trialled its food delivery service AmazonFresh in London last year.
Whole Foods, which has 460 supermarkets worldwide and nine in the UK, specialises in ethically-sourced food free of artificial preservatives. Founded in Texas in 1978, it is now the eighth largest grocery retailer in the US.
The chain has built a cult following of health-conscious customers and popular items include organic ‘riced’ cauliflower, grass-fed ground beef, trendy Hass avocados and Italian lime sparkling water.
Amazon’s bid sent shockwaves through the industry just as big players such as Tesco and Sainsbury’s appeared to be fighting back against budget rivals such as Aldi and Lidl.
Chris Beauchamp, analyst at City trading firm IG, said: ‘If we thought the supermarkets in the UK had trouble with the emergence of the German discounters, it is as nothing compared to the ramifications of Amazon’s expansion into grocery. Amazon’s deal shows that bricks and mortar retailing isn’t dead; it’s instead about to go through a fascinating metamorphosis.’ He added: ‘Amazon doesn’t so much park its tanks on a sector’s lawn as crash them through the store frontage.’
Yesterday’s announcement sent supermarket shares tumbling. Tesco shares closed down 4.9 per cent as early gains on the back of its best sales figures for seven years were wiped out.
Analyst Jasper Lawler, of London Capital Group, said: ‘Investors flipped from satisfaction at the highest sales growth in seven years to fears that Amazon could knock Tesco off its perch as Britain’s number one supermarket.’
Amazon’s takeover is potentially hazardous for the retail industry because of the sheer scale of its business.
Unlike high street grocers, which operate on low margins and need to keep tight controls on costs to make profits, the web giant’s £366billion market value means it can afford to make years of losses.
Sam Fuller, of global investment bank GCA Altium, said: ‘Anyone who doubted Amazon’s commitment to conquering the grocery sector will now be eating an expensive organic pie.’ The firm has already made forays into the food home delivery market. Under Amazon Fresh, which was rolled out in the UK last year, the tech giant linked with Morrisons to supply the grocer’s own products and branded goods like Flora margarine, Cornetto ice creams and Yeo Valley yoghurts.
It has also revealed a concept for its first digital store, Amazon Go, that allows shoppers to avoid checkout queues. An app that allows them to walk out of the building with their goods – and be billed online later.
‘Knock Tesco off its perch’
SUPERMARKET shares fell on both sides of the Atlantic yesterday as Amazon mounted a shock £10.7bn bid for organic retail chain Whole Foods.
The audacious foray into the grocery market sparked a sharp sell-off at rivals, wiping £1.5bn from the value of Tesco, Sainsbury’s and Marks & Spencer as traders feared the internet giant was about to plough billions of pounds into the industry.
US competitors fell as much as 15pc on the New York stock market – but Whole Foods jumped nearly 30pc and Amazon climbed 3pc.
Amazon’s decision to wade into the grocery market was not a surprise, although few thought it would opt to buy a bricks-and-mortar business.
‘This is a big, big play by Amazon that is leaving rivals quaking,’ said Neil Wilson of trading firm ETX Capital.
‘Amazon looks set to dominate the food sector now just as much as it does non-food. Amazon brings incredible scale and pricing power that will make life a lot tougher for anyone else. It’s caused carnage among retailers.’
Whole Foods, which sells premium, ethically sourced groceries such as black truffles and organic almond butter, has suffered from falling sales and a reputation for sky-high prices. Bosses were under pressure to find a buyer after a battle with hedge fund Jana Partners over the direction of the company.
Jana had accused the business of ‘chronic underperformance’ but Whole Foods founder chief executive John Mackey said the investor was a ‘greedy b ****** ’ and would face a fight if it wanted to seize control.
But although most analysts expected a deal of some kind, Amazon’s raid has stunned even veteran observers of the retail scene. ‘That deal was rumoured. I totally dismissed it,’ said Tim Ghriskey, a partner at Solaris Asset Management. ‘Amazon can pour money into any investment and they don’t need to make money.’
Whole Foods is very heavily focused on the US market, with 444 stores in the country.
It has only nine outlets in the UK – but this was not enough to save British rivals from a beating on the market.
Amazon is worth £366.6bn, nearly 12 times the combined value of the four biggest listed British grocers. Tesco yesterday dropped 4.9pc, or 78.85p, to 171.1p, Sainsbury’s fell 3.9pc, or 10.1p, to 252.3p, and Marks & Spencer closed down 1.9pc, or 6.6p, at 345.2p.
The only large food seller to escape this sea of red was Morrisons. It dropped sharply when the announcement was made around 2pm, but quickly climbed again as investors remembered the chain had a deal allowing customers to order online.
That tie-up is likely to protect it if Amazon launches a full-throttle raid on the sector – and could make it a takeover target.
‘This is very much showing that Amazon has designs on the grocery sector and is taking a step off the web and into the High Street,’ said Hargreaves Lansdown analyst Laith Khalaf.
He added: ‘What’s scaring people is Amazon has a very high tolerance for failure.
‘They’re willing to go down a route and suffer quite a lot of pain to get where they want, and that inflicts quite a lot of pain on other market participants.’
In America, the grocery sell-off was even worse.
Walmart fell as much as 6pc, Target dropped 10pc and Costco was down 8pc.
The biggest loser of all was Kroger, the biggest retailer by number of stores, which plummeted 15pc shortly after the opening bell.