When Wal-Mart Stores Inc bought online retailer Jet.com for $3 billion last year, it marked a crucial moment – the world’s largest brick-and-mortar retailer, after years of ceding e-commerce leadership to arch rival Amazon, intended to compete.
On Friday, Amazon.com Inc countered. With its $14 billion purchase of grocery chain Whole Foods Market Inc, the largest e-commerce company announced its intention to take on Wal-Mart in the brick-and-mortar world.
The two deals make it clear that the lines that divided traditional retail from e-commerce are disappearing.
Amazon’s purchase of Whole Foods also brings disruption to the $700 billion US grocery sector, a traditional area of retailing that stands on the precipice of a ferocious price war.
Amazon’s move aims at the heart of the Bentonville, Arkansas-based retail giant’s business - groceries, which account for 56 per cent of Wal-Mart’s $486 billion in revenue for the year ending January 31. With the deal, Whole Foods’ more than 460 stores become a test bed with which Amazon can learn how to compete with Wal-Mart’s 4,700 stores with a large grocery offering that are also within 16 km of 90 per cent of the US population.
Amazon is expected to lower Whole Foods’ notoriously high prices, enabling it to pursue Wal-Mart’s customers. The push comes as Wal-Mart is headed in the opposite direction – going after Amazon’s higher-income shoppers with a recent string of acquisitions of online brands such as Moosejaw and Modcloth and on Friday, menswear e-tailer Bonobos.
Wal-Mart may be ready. In preparation for the grocery price war, Wal-Mart in recent months has cut grocery prices, improved fresh food and meat offerings, modernised shelving and lighting in its grocery aisles, and expanded its online grocery pickup service.
Marc Lore, the Jet.com founder who now runs Wal-Mart’s e-commerce business after selling a startup to Amazon, said that Amazon’s move does not change Wal-Mart’s game plan. “We’re playing offense,” he said.
Wal-Mart is offering curbside pickup of online grocery purchases at 700 locations, with 300 more planned by year end. It also is testing same-day fresh and frozen home delivery from 10 of its stores.
“We see an opportunity to do a lot more of that,” Lore said.
Roger Davidson, who oversaw Wal-Mart’s global food procurement and now is president of Oakton Advisory Group, said the deal will reduce Wal-Mart’s brick-and-mortar advantage.
Some industry observers say Amazon will find it difficult to use Whole Foods to pull away Wal-Mart shoppers because the two stores appeal to different customers.
But Michelle Grant, head of retailing at market research firm Euromonitor, said Amazon could use an obscure part of the Whole Foods portfolio – Whole Foods 365 – to lure Wal-Mart shoppers.
Whole Foods 365 offers private-label goods and lower prices than typical Whole Foods stores, and is targeted at younger, value-conscious shoppers. Amazon could provide the financial capital and tactical ability to build that into something big.
A Whole Foods Market in the Manhattan borough of New York City. PHOTO: REUTERS