Game Changer
By Dan Bolton
Coffee and tea are portable, non-perishable, compact, and ship light. Add the convenience of home delivery and it is easy to see why online sales of these high-margin beverages are booming.
Amazon’s $13.7 billion acquisition of Whole Foods will accelerate that growth and literally reshape the retail landscape for beverage retailers.
The immediate impact will be global access to coffee and tea brands that have been carefully nurtured in Whole Food Markets in the US, Canada, and the U.K. The grocer’s very successful promotion of locally produced foods (many stores stock upwards of 500 local brands) led Whole Foods to establish close relations with hundreds of small roasters like San Francisco’s Philz Coffee.
Founder Phil Jaber, beginning in 2003, tried for years to convince the Whole Foods down the street from his original coffee shop to stock his exceptional blends. Eventually, he succeeded and sales soared. The coffee chain has since expanded to 37 shops and is stocked by every Whole Foods in the Bay Area.
This happy circumstance will be repeated in hundreds of cities.
The acquisition, if approved by federal regulators, dramatically changes the US grocery market. The announcement sent shudders through the $800 billion traditional grocery segment, as it will ultimately lead to the closure of traditional strip mall supermarkets.
Investors foresee a repeat of what happened to Blockbuster’s 9,000 video stores after Netflix caught on. Long term, the boost in online food sales will crush the dreams of many mall-based specialty beverage merchants by transforming the retail mix.
Foot traffic already has significantly declined in traditional malls with Amazon’s dismantling of anchor tenants. The online merchant now sells more clothes, shoes, and dry goods than the top 10 department stores combined. Meanwhile, mall-based tea merchants are stranded paying high rents with fewer transactions against competitive online pricing, a situation that forced 22-store Annapolis-based Capital Teas to declare bankruptcy in July.
Grocery isn’t going away ― the deal enhances the appeal of the 450 brick-and-mortar Whole Foods stores in 42 states ― but why stock general merchandise when online selections abound? Center store stables will disappear in favor of fresh “touch, feel, and taste” items on the periphery.
Whole Foods is the most profitable grocer in the world based on revenue per square foot. Jeff Bezos, who offered cash for the Whole Foods chain, is only $5 billion short of being named the richest man in the world.
He isn’t just trying to change the way groceries are sold, expanded distribution is a critical advantage. Just as it did with books, Amazon will change the way food products are manufactured and marketed. Processed consumer packaged goods will suffer, specialty and organic foods will thrive.
Whole Foods’ reasonably priced 365 house brand, paired with the Amazon Fresh grocery delivery unit will transform the view that quality is costly: the nickname “Whole Paycheck” will morph into “wholesome value.”