Does Amazon’s Acquisition of Whole Foods put Grocery Anchored Shopping Centers on Notice?

Jun 25 2018

When Amazon bought Whole Foods last year, naysayers in the real estate industry saw the beginning of the end for many traditional grocery stores. Amazon was already poised to take over the retail world and now they want to revolutionize food distribution and redefine how groceries are purchased by consumers. Amazon realized it needed a substantial brick and mortar presence to successfully grow its online presence of grocery sales, and they saw this multi-channel network as a perfect opportunity to disrupt and potentially dominate the food/grocery sector. As a result, Amazon bought Whole Foods in an effort to grow online grocery sales through retail locations that extend Amazon’s massive fulfillment network with the goal of substantially growing Whole Foods’ existing 2% market share of the huge $641 billion market for grocery sales generated in 2017. 

The Amazon Effect on the Grocery Competitive Landscape

So, what has changed in the grocery sector since this acquisition was announced in 2017? Quite a bit to be sure. Amazon’s acquisition of Whole Foods has changed the competitive landscape for grocery stores including larger grocery retailers such as Walmart and more traditional grocers like Kroger. Consumer buying patterns are also changing and shopping for groceries is no exception. While approximately 4% of all groceries are now purchased online, it is anticipated that more than 20% of all groceries will be purchased online by 2025 so supermarket and grocery retailers have been forced to respond. Walmart purchased online retailer Jet.com last year and recently acquired a NY-based last-mile delivery start-up called Parcel to be more competitive with Amazon/Whole Foods in delivering general merchandise and fresh/frozen groceries from Walmart. Kroger has implemented an online grocery ordering service called ClickList that allows consumers to order products and groceries online and then pick up their order at the store. For its part, Amazon/Whole Foods has continued it cost-cutting and efficiency measures using Amazon’s vendor leverage to reduce Whole Foods’ costs and now offers Amazon Prime’s more than 100 million members many discount benefits, including price cuts which are now available in 121 Whole Foods stores in 12 states along with free two-hour grocery delivery. The Amazon/Whole Foods delivery program is currently available in 7 major cities and will be expanded in the U.S. later this year.  Whole Foods, along with several of its competitors including Sprouts and HEB’s Central Market, also uses Instacart to provide same-day grocery delivery to its customers.

Grocery Chains Who Invest in Technology & Strong Management to Hold Their Own

Well-run, market share-dominant grocery store chains like HEB, Kroger, Publix, Wegmans and Whole Foods will continue to compete for increased market share and will essentially win the supermarket grocery wars. Conversely, weaker grocery store chains such as Southeastern Grocers (which owns Winn Dixie and Bi-Lo) and NY- based Tops Friendly Markets have been forced to file for bankruptcy protection this year. These types of grocery chains have been saddled with debt and have been unable to invest in the technology needed to respond to the ever-changing grocery market. Other weaker grocery stores that cannot adapt and invest will be more likely to fail and will not be able to competitively survive in the long term. At the same time, successful discount grocery chains such as ALDI continue to increase market share and grow aggressively without having to adopt an online or grocery delivery strategy to compete for more price-conscious and moderate-income consumers. As a value and price leader, ALDI has been able to grow its market share and customer base by investing primarily in private label brands (which account for approximately 18% of the total market for grocery sales) and has perfected the concept of brand deletion through its generic offerings. 

The Amazon Acquisition of Whole Foods Necessitates a Grocery-Anchored & Retail Evolution

What does all of this mean for the future of grocery-anchored shopping centers? For owners, investors and lenders, well- located necessity-based retail centers that are anchored by market-leading grocery stores will continue to be in high demand and will command the lowest cap rates in the marketplace. While the number of grocery store openings declined 29 percent in the year that Amazon acquired Whole Foods, investments in grocery-anchored shopping centers increased 5.3% over 2016. Grocery-anchored centers continue to be viewed as a highly sought-after defensive play against e-commerce and are generally viewed by investors as a safe investment.  Internet-resistant junior box retailers like Ross, TJ Maxx and Ulta combined with experiential concepts such as movie theaters and sit-down restaurants offer an additional layer of safety and convenience for owners and buyers of larger grocery-anchored shopping centers while service-oriented retailers and QSR’s are defensive and in strong demand for smaller, cookie-cutter sized grocery-anchored centers. In addition, technological innovation and adaptation will continue to drive the future of retail and grocery shopping as retailers and property owners continue to implement the latest technology available (including consumer-driven data and blockchain applications) to better understand and predict evolving trends and changes in consumer behavior.