Amazon and Walmart: The Next Big Rivalry

Growing up in the greater Boston area, I’m quite familiar with rivalries. Rivalries are simply a way of life here. There’s Red Sox – Yankees, Lakers – Celtics, Bruins – Canadiens, Patriots – Roger Goodell, Space Savers – Non Space Savers during winter storms, Dunkin’ Donuts – Starbucks, Mike’s – Modern, and the list goes on. Over the last couple of months, another rivalry has been taking center stage though: Amazon – Walmart.

Amazon has certainly transformed itself over the last twenty-plus years, from an online book store that began selling CDs and DVDs, to an online marketplace that sold everything you could possibly imagine, to a global logistics firm that has its fingers on everything from private fleets to cargo planes and everything in between. At the same time, Walmart has undergone quite the transformation as well. Granted, Walmart is still a brick-and-mortar, high-volume, low-margin retailer first and foremost. However, the company has made significant strides in its online presence, with a focus on building out a more well-rounded and diverse set of offerings that will attract customers from all walks of life. Walmart’s last six acquisitions, in the last year alone, demonstrate the changing nature of their business: Jet.com, Hayneedle.com, Shoebuy.com, Moosejaw, Modcloth.com, and the recently completed acquisition of Bonobos. These acquisitions represent over $3.5 billion spent on expanding the company’s retail offerings, with a strong focus on digital retailing.

Amazon has also been quite active in the acquisitions department. However, unlike Walmart, Amazon has not focused solely on acquiring rival retailers. Instead, Amazon has invested in a variety of technologies including 3D printing, Internet of Things, cloud infrastructure, text translation software, e-commerce platforms in foreign countries, and of course, logistics. But the biggest news in the rivalry was Amazon’s recent announcement of its acquisition of Whole Foods for $13.7 billion in cash. With the announcement, Whole Foods’ stock price soared as investors anticipated a bidding war. Initially, the stock price jump would have paid for the acquisition, but stock prices have normalized as analysts have essentially given up hope of a bidding war. Walmart was rumored to be interested in stepping in to outbid Amazon, however, the company has since declared it will not offer a competing bid.

So what does this acquisition mean for Amazon, Walmart, and everyone else?

First, and foremost, the move finally puts Amazon in the position that it has been working towards for years in the grocery space. Grocery has been one area that Amazon has not been able to crack, even with the launch of Amazon Fresh. By bringing the Whole Foods brand into the Amazon family, the company immediately gets a boost for its grocery business. It also gives Amazon a step up in the organic food market, which has been growing by leaps and bounds. However, even with the acquisition of Whole Foods, Amazon is still in the rearview mirror of Walmart in terms of organic grocery sales, due in part to Walmart’s ability to undercut other grocery retailers in price.

Second, the acquisition puts the Whole Foods – Instacart partnership in an interesting position. Instacart is probably the best known crowd-sourced, last mile delivery service in North America. And just last year, Whole Foods and Instacart signed a five-year delivery contract. In the long term, it is hard to imagine that Amazon is willing to let Instacart handle grocery delivery services, especially with their own Prime Now and Fresh options. Apparently there is language within the contract around exclusivity on perishables delivery, meaning that Amazon could potentially step in immediately to take over the packaged goods portion of grocery delivery for Whole Foods. Amazon will most likely look for a way to get out of the deal in the long run, even if that means buying out the perishables portion for what will be a serious amount of cash. Either way, Instacart is set to take a hit in revenues.

Third, a lot of people have written about how Amazon’s acquisition of Whole Foods could spell the end of the brick and mortar grocery store. Even the most diehard pessimist doesn’t see this as an immediate result, but rather a long-term result. I’d say this is being pretty short-sighted. While it is entirely possible that Amazon will try to automate a lot of the store, such as in their smart store in Seattle, it simply does not make sense to turn Whole Foods into an online business. For one, the majority of Whole Foods locations do not offer the right layout to switch over to a delivery warehouse, as they do not have the required docks or back room space. Second, Whole Foods has a specific culture and customer experience that is core to its brand. To move away from that would dilute the brand too much. However, the idea that Amazon would snatch up a large-scale retailer to enhance its warehouse and distribution system is certainly not so far-fetched, given their recent links to BJs Wholesale Club.

Finally, what does the acquisition mean to Walmart? In some way, it really does not change a whole lot for Walmart. The company is still going to be the largest provider of organic foods in North America as well as the overall leader in grocery sales. It also will not change their acquisition strategy as they continue to build out their digital focus. While I do not see any rash moves by Walmart, investments in online grocery and click and collect technologies would certainly not be a surprise.

In conclusion, Amazon’s acquisition of Whole Foods has a ripple effect across the industry. It finally puts Amazon in a good position in terms of grocery, which they had been lacking. It also opens up a new revenue stream for Prime Now and Amazon Fresh, while taking future market share away from Instacart. While Walmart does not need to change its strategy to combat the acquisition, I do expect there will be some sort of response. Either way, the rivalry is only growing stronger and I have the feeling we have not seen the end of the growth by acquisition strategy from either company.

Comments

  1. This is the best analysis of the acquisition I’ve seen. And I’m not just saying that because Chris is a colleague.

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