Amazon confesses: Online retailing doesn't work

Not content to beat traditional retailers, Amazon has decided to join them with a takeover of Whole Foods Market.

It’s ironic that Woolworths’ (ASX: WOW) share price fell 4% yesterday. It came on top of US grocery retailers’ stocks plunging on Friday – Walmart (NYSE: WMT), Target (NYSE: TGT) and Kroger (NYSE: KR) fell 4%, 6% and 12% respectively.

The reason for the nervousness? Amazon (Nasdaq: AMZN), as usual. Last week the online retailing behemoth announced it was buying Whole Foods Market Inc. (Nasdaq: WFM), a premium grocery retailer, for US$14bn. The deal will give the combined company a 2% share of the US grocery market.

What’s ironic is that, by launching this takeover, Amazon has effectively admitted online grocery retailing doesn’t work. Amazon now thinks that having more than 460 Whole Foods stores will progress its grocery retailing ambitions (and it probably will).

Bricks and clicks?

Following this transaction, Amazon will no longer be an ‘online’ retailer. It will be just a retailer, albeit a very strong one.

What this transaction implies is very interesting: there must be value in having a store network. In fact, that’s exactly what Wesfarmers (ASX: WES), the owner of Coles, said in its Strategy Day earlier this month.

So Amazon’s decision is a vote of confidence in ‘bricks and mortar’ retailing, even if it will remain primarily an online retailer. If anything, traditional retailers should feel more confident that, with the right investment in marketing and technology, their store networks should be able to work alongside their online operations.

Given that, perhaps Woolworths’ share price should have risen. It already has 990 stores across Australia and an online grocery delivery business.

Of course, it’s also possible that Amazon has jumped the shark. With investors enamoured of the ‘FAANGs’, they just haven’t realised it yet.

Amazon no Go

Despite the monumental hype surrounding the company, not everything Amazon touches turns to gold. Its grocery delivery business has struggled to gain traction – perhaps explaining the Whole Foods acquisition – while Amazon Go, its ‘just walk out’ concept store, has been suffering technical issues.

Amazon is also surprisingly diversified. Its lack of focus would probably earn it criticism had the stock not tripled over the past three years.

The company is most famously an online (and now ‘offline’) retailer, with distribution centres in about a dozen countries. On top of that it sells subscriptions, consumer electronics, video on demand and music. But its fastest-growing and most profitable division is Amazon Web Services, which provides cloud computing services. Amazon is a company with many fingers in a lot of pies.

What might the acquisition of Whole Foods mean for Amazon’s entry to Australia? Well, it’s something we’ll consider in our forthcoming series on how Australian retailers might be affected.

But there are few obvious targets should Amazon wish to buy something in Australia. Metcash (ASX: MTS) is unlikely to be of interest because it doesn’t own the stores it supplies with groceries. And, with Woolworths and Coles so dominant, Amazon will find it difficult to establish a premium grocery chain like Whole Foods locally.

With news of the Whole Foods transaction, Amazon has yet again frightened the horses. Already skittish, it doesn’t take much to scare Australian investors in retail stocks even more.

But one thing should be clearer now: If Amazon is set to become just another retailer, maybe Australian retailers should be a teensy bit less worried?

One of the Australian retailers in this article is close to being upgraded to BUY. To get more insights, stock research and recommendations, take a 15 day free trial of Intelligent Investor now. You can find out about investing directly in Intelligent Investor portfolios by clicking here.

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