Amazon, Whole Foods, seismic shift American retail

Seismic shift

As far as I can tell, the Australian wine community’s response to the announcement that Amazon has made a bid for Whole Foods (WF) in the US is that it’s just one of those things – it’s hardly a seismic shift!

This is understandable thinking for a small winery, say in the New England Australia region, or any small winery that relies on tourism, mail order and perhaps a few local restaurant sales. But scaling up, medium and larger producers need to be aware of – and maybe even worried about – what is happening in the US supermarket landscape.

The deal that Amazon has reportedly put forward is US$42 ($55.40) a share, valuing WF at US$13.7 billion. At the time of the offer, this was a 27 per cent premium on the share price.

It appears the heralded demise of brick and mortar stores is premature. Yet the deal will bring change, and that change will affect suppliers, including Australian wine producers. It was only a couple of weeks ago that Australian Vintage was looking to increase its lacklustre performance in the US, and Accolade Wines seems to be getting its act together after years of neglect.

John Wasik, writing in Forbes on 21 June:

“There’s always a fine line between creative disruption and creative destruction. Such is the beastly nature of capitalism.”

According to Wasik, the deal is about busting the supply chain. Amazon is planning to reinvent the current business style and “create a new business model”.

If that doesn’t put a tremor through suppliers, TKR is unsure what would. The obvious move is direct dealing with domestic suppliers, and the streamlining of all suppliers. Margins for those suppliers will be skinny.

Wasik: “Reinvent inventory systems: Amazon’s great power lies in its computer systems, which track the location and movement of millions of items. What if Amazon efficiently applied its computing power to the even more complex food distribution system, which relies on moving perishable items into warehouses and stores before they spoil?

“The massive disruption in inventory systems is this: Amazon will establish direct relationships with farmers, thus trimming the produce and meat distribution network. Cut the middleman out and you can offer faster delivery and a greater quantity of goods at a lower price.”

Matthew Yglesias’s story on on 20 June had an eye-opening headline and standfirst: “The real reason Amazon buying Whole Foods terrifies the competition: Amazon’s zero profit strategy is a disaster for anyone who goes up against it.”

Zero is harsh but it’s not far off. Amazon’s figures (below, in US$) are interesting: high sales but very small net profits. With a share price of US$1004, investors must be looking for a return some time in the future.

Period ending: 31 Dec 2016 31 Dec 2015 31 Dec 2014 31 Dec 2013
Total revenue $135,987,000 $107,006,000 $88,988,000 $74,452,000
Cost of revenue $88,265,000 $71,651,000 $62,752,000 $54,181,000
Gross profit $47,722,000 $35,355,000 $26,236,000 $20,271,000
Net profit $2,371,000 $596,000 Loss $241,000 $274,000

Yglesias’s view is that WF,

under Amazon’s stewardship will almost certainly accept lower profit margins than it does as an independent chain — and that spells trouble for everyone else in the grocery business.”

“But the reason the takeover is such a disaster for the industry is that the financial implications are bleak even if Amazon doesn’t succeed in bringing incredible game-changing innovation to the sector. Introducing a player into the market that doesn’t care about profit margins is going to be devastating to competitors who have to.”

The US wine trade is concerned, but at the moment not too sure what to be concerned about.

Angela Slade, vice-president brand strategy & communication, Pacific Highway Wines & Spirits:

“The Whole Foods announcement happened the very day after we met with the buyers for a major pitching meeting for 2018. We do a lot of business with WF and no one really knows quite what to expect. When asked about it over the weekend and if it’s biz as usual, the buyer noted only, ‘you know as much as I do’…”

Slade said the chatter among wine folk led to an opinion of “game on, for taking grocery to a new, creative level… whatever that may entail”.  

The Amazon-WF takeover is one aspect of the US grocery market; another is the growing estates of the German discount retailers.

Aldi has announced it’s to invest US$3.4 billion in expanding its American estate from the 1600 it currently has to 2500 by 2022. It’s also to spend a further US$1.6 billion remodelling stores.

Entering the US market, Lidl opened its first 10 US stores on 15 June, along the east coast. It is challenging established grocers by undercutting prices by up to 50 per cent on certain lines.

Wal-Mart is rising to the challenge by testing lower prices in some states. Newspaper reports suggest it is spending US$6 billion to keep its reputation as the low-price supermarket.

It’s looking as if Aldi and Lidl will go head-to-head, but combining the two as a mythical one, between them they will deliver a blow to Wal-Mart and others, including Amazon-WF.

The Amazon-WF tie-up may be part-experimental but Lidl has more than 10,000 stores around the world and an established format that is already successful. The company has been testing the US market via a store it set up in Fredericksburg, Virginia, more than a year ago. The results show what Americans expect from their supermarket shopping: apparently free bakery samples and chilled beer have some priority.

One report says Lidl is planning a wine range of about 120 lines, starting at US$2.89. TKR doesn’t think this end of retail wine pricing will turn out to be the real talking point of the Lidl range, but what it puts on the shelves around US$9-US$14 will be where the good quality-to-price ratio comes into play.

Meanwhile, some American and Australian industry/trade eyes and ears are open and watching, though at this stage they don’t know what way it will pan out.

Aaron Ridgway, Wine Australia, head of market, Americas:

“We are watching it carefully because Amazon’s efforts to sell wine have been limited up to now. If well-funded ownership means Whole Foods can ramp up its delivery business we may see a hitherto unexpected channel for more wine sales. 

“As for aggressive expansion, Lidl etc, I think certain companies (and investors) feel that the national grocery market, at US$800bn, is split between too few companies. It is interesting to see heavy brick-and-mortar investment though, when e-commerce is growing faster than traditional store sales. 

“Fair enough, Amazon just bought 460 physical stores, but it was also responsible for one-quarter of all the growth in e-commerce sales in the last quarter of 2016. That’s what’s really fascinating to me: a technology disrupter investing in what some feel is a legacy business. We shall see.” 

Gordon Little, partner and CEO, Little Peacock Imports, has been discussing US retail with other wine folk and says: Nobody sees the Amazon/Whole Foods as a big disrupter in the alcohol space… yet.”

“Yet” is an extremely big word in this context. Little feels consumers will keep buying wine from brick-and-mortar stores and the complex laws covering import and distribution of wine will continue to make commerce complicated.

He adds a rider: “Some distributors have mentioned seeing the purchase as positive, as their [Amazon’s] massive lobbying power may actually break down some barriers to interstate trade.”

The issue here is the consolidation of wholesalers resulting in huge portfolios, so large that a lot of product gets lost. Little: “They’re so busy selling whatever’s the easiest path to commission.”

Some Australian producers are placing a lot of faith in direct-to-consumer sites, some of which import wine in bulk, and bottle locally under their own proprietary labels. In effect, it’s an own-brand and margin can be set and kept.

Little thinks it’s very difficult to open an independent wine store on the east coast catering for locals. “Got to think bigger, create national lists, proactively court customers, send out email offers, have an offsite warehouse where you can buy deep to get better wholesale pricing etc.”

Steve Raye, president of Bevology Inc, knows the US wine industry in all its aspects in depth. He puts forward some points of interest:

  • The purchase of Whole Foods by Amazon. That’s a US$13.7 billion way to say delivery is an important feature of retailing in food, and given Amazon’s control of a large portion of wine e-commerce, also wine.  

Raye’s advice is “stay tuned”. On Lidl, he says:

  • Entry of Lidl to complement what Costco is doing… will have significant footprint as they expand. Right now, not too many people are aware they’re out there and focusing to some degree on wine (and beer, I presume).

Like Little, Raye sees growth in private label:

  • Tremendous growth and interest. As the big suppliers and distributors focus on the bigger brands, retailers are focusing on high-margin items they can control [and] cross-sell customers to, or build relationships with customers based on unique products.

In summary, Raye forecasts:

  • Continued growth, specialisation and innovative value-add concepts for traditional wine/spirit shops. Per Nielsen data, they continue to expand and represent the majority of sales for wines over US$10 (there is no consistency on category name in the system; some even call that price premium or super premium).  
  • These include variants such as delivery/order for pick-up (eg delivery-within-an-hour apps like Minibar Delivery, Drizly). Enhanced searches for specific wines by providers such as Drync (met them last week, meeting again for a deeper meeting next week… very interesting service that works behind the scenes as a promo tool for an individual store online, driving new and returning customer growth in numbers, total sales and net margin). 

The consolidation of wholesalers has resulted in the top 10 being responsible for about US$39 billion of the almost US$53 billion US wine market:

Raye points out that in 1977 there were five to eight wholesalers in all states, and more than 3000 Wine & Spirits Wholesalers of America (WSWA) members

In 2017 there are two major wholesalers in most states and just 360 WSWA members.

According to Nielsen figures, for the 52 weeks to 25 March 2017, Australian wine was down 2.8 per cent in volume and 0.2 per cent in value in the US. Converting total wine into nine-litre cases, this amounted to 12.3 million cases. Consider that about 7 million cases came from the Casella Yellow Tail brand and it’s not a good look.

No matter one’s views on Yellow Tail, we think this vast representation is pulling the Australian category down.

The American retail landscape is changing, but with Australian eyes all seemly focused on China, we fear Australia could lose out stateside.

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