The announcement of Amazon’s $13.7 billion acquisition of Whole Foods capped an eventful week in the grocery industry. German-owned discount grocer Aldi says it will invest $3.4 billion to expand to 2,500 stores — up from 1,600 stores today — by 2022 as part of its plan to become the third-largest grocery chain in the U.S. by store count. And Kroger, the number-one supermarket chain in the world by revenue, reported its second straight quarter of declining same-store sales.

The grocery industry, including lifestyle grocers like Whole Foods, has been facing new challenges for share of wallet thanks to increased competition and changing customer preferences to small format retailers (discount, convenience, and drug) and online players (Amazon). Consumer grocery store trips are up only .5 percent YOY, while discount store trips are up 2.9 percent YOY.

Since 2007, Amazon has been expanding its touch points into grocery through a variety of offerings, including AmazonFresh, which is now available in 20 cities for same-day or next-day home delivery; Amazon Prime Pantry, where Prime members can shop for groceries and household products in everyday package sizes; and Amazon Prime Now, which can quickly deliver fruits, vegetables, meats and other groceries through local supermarket partnerships. Some 50% of online grocery in the U.S. is now driven by Amazon Prime.

Causing disruption in an already fluctuating industry

JDA predicts the Amazon acquisition of Whole Foods will disrupt the grocery industry through competitive pricing, innovation and technology, an increased online presence, and by instigating other mergers, acquisitions, and closings.

As Amazon makes Whole Foods more competitive in pricing it will disrupt what has become a growing segment for their competitors (fresh, organic, local, gourmet) who have taken market share from Whole Foods and have continued to expand out their offerings. It also means further erosion of already thin margins in an environment of consumer-driven price deflation.

The introduction of technology-driven convenience and a differentiated shopping experience will put pressure on competitors to keep up, driving quicker adoption of IoT and other digital strategies.  This will force retailers to increase their technology and store renovation spends.

Amazon will find innovative ways to marry this new physical asset with its market leading online presence. With U.S. buy online pickup in store volumes currently registering lower than 3 percent, the stage is set for Amazon/Whole Foods to make a major change in how online has been viewed in grocery. Amazon’s Dash Wand, Dash Buttons, and Echo could become major elements of a combined digital/physical strategy.

Pricing strategies, technology, and an online presence will all put pressure on grocers to achieve scale and efficiency. Smaller players that cannot define a niche will become targets for acquisition as will larger players who cannot quickly embrace the new reality in grocery.

Making a high-stakes wager on profitability

This acquisition does pose potential risk for Amazon, however. In addressing the pricing disparity that’s always existed between Whole Foods and other grocers – many of whom have moved into the organic and gourmet space that Whole Foods occupies and taken market share – Amazon must demonstrate that it can drive profitability and operational efficiency within its retail operations. The acquisition of Whole Foods makes this a very public experiment as opposed to the purchase of a smaller, regional grocer or wholesale club. When looking at Amazon’s history we cannot assume that Whole Foods will be the only grocery acquisition for Amazon. It may soon set its sights on other vulnerable players in the industry.

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