Confidence in Woolworths’ turnaround has finally been shaken, not by fears of a price war with Coles but Amazon’s $18 billion acquisition of US retailer Whole Foods, which makes the online retailer’s entry into the $90 billion Australian grocery market more likely.
Woolworths shares, which have been on an upwards trajectory since January, fell almost 4 per cent to $25.33 in heavier than usual trade on Monday, posting its biggest decline since November. Coles owner Wesfarmers and Metcash also lost ground, closing down 0.2 per cent at $40.61 and 2.3 per cent at $2.10.
The fall in Woolworths shares mirrored a sell-down in US food stocks last Friday after Amazon announced a proposed $US13.7 billion ($18 billion) bid for Whole Foods, triggering fears that Amazon could eventually have as big an impact on the grocery sector as it has in non-food retailing.
Analysts had previously believed that Australian food retailers faced less disruption from Amazon than non-food retailers such as Myer and JB Hi-Fi, pointing to the high cost of picking and delivering fresh food and the need for local scale rather than global scale.
The Whole Foods deal has changed that view. Analysts said the acquisition showed that Amazon was serious about conquering the US grocery market and raised the risk for Australian retailers as the online juggernaut prepared to roll out its suite of products and services in Australia.
Amazon’s entry into the Australian grocery sector in time is now more likely,” said JP Morgan analyst Shaun Cousins. “The more likely prospect of an Amazon Fresh offer is in our view a negative for all food retailers in Australia.”
Amazon may eventually make a similar acquisition to establish a significant presence in Australia, where online grocery sales represent about 2.9 per cent of the market or about $3.6 billion and are dominated by Woolworths and Coles.
“They would prove up what they’re doing in the US first,” said Morgan Stanley analyst Tom Kierath, “but it shows their intent and that they’re serious about food retailing and they want to do it properly.”
In a report this month Morgan Stanley estimated that Amazon could garner at least 22 per cent of Australian online grocery sales, or $1.9 billion, within 10 years as online sales more than doubled to $8.5 billion, or 4.9 per cent of the market.
Investors said the sell-off in Woolworths shares was a “massive overreaction”, considering that Amazon has not yet launched its full retail offer in Australia.
“People are jumping the gun,” said Wilson Asset Management portfolio manager John Ayoub. “The facts around Amazon’s eventual entry to Australia aren’t known yet.
“The acquisition of Whole Foods is a failure of the pure online distribution and fulfillment model – it shows they need a bricks and mortar presence for fresh. Amazon has had its fresh offering in the US for a decade and has 0.2 per cent market share – this says they have to change their strategy.”
WAM portfolio manager Matthew Haupt added the Whole Foods deal was “a learning experience for Amazon where they’ll test the market and test what works”.
“Everyone assumes they’ll come in and their offering will resonate, but it’s way too early to call. While it’s an increased threat … to apply that to Australian stocks at the moment is a little bit irrational,” Mr Haupt said.
WAM believes that if Amazon wanted to make a similar acquisition in Australia then Woolworths or Coles were obvious targets.
However, Citigroup believes an acquisition of Woolworths, which has a market value of $34 billion, or Coles, which is estimated by analysts to be worth $18 billion, is unlikely, given the size of the market.
After adjusting for Australia’s population, the Whole Foods acquisition is the equivalent of a 34-store, $1.5 billion turnover business in Australia – half the size of independent retailer Ritchies IGA and a quarter of the size of Foodland SA.
Citigroup also doubted that wholesaler Metcash was a likely target, saying the Whole Foods acquisition was aimed at securing a retail footprint rather than product or logistics capability.
More than 90 per cent of Metcash’s IGA stores are owned and operated by independent retailers and its quasi-franchise structure would add too much complexity.
“Amazon will be disruptive to all retailers when it enters Australia. However, access to product and distribution points will determine its success, particularly in grocery,” said Citi analyst Bryan Raymond.
“Amazon’s penetration in grocery is likely to be small and pricing to be less disruptive as Amazon has [to date] taken a premium approach to grocery, with price points above major bricks and mortar competitors. As a result, we see less risk to Coles and Woolworths from Amazon than to discretionary retailers.”
What about Harris Farm?
One potential target is privately owned upmarket food retailer Harris Farm Markets, which has 26 stores in NSW and is looking for acquisitions and suitable 1000 to 3000 square metre sites in other states after bedding down the purchase of Norton Street Grocer.
An acquisition of Harris Farm would give Amazon a retail footprint that could be expanded nationally – providing pick-up points for online customers and distribution points for home deliveries – and enable it to develop relationships with fresh and packaged food suppliers.
Harris Farm director Angus Harris said there had been no contact with Amazon, but said Whole Foods was an inspiration to Harris Farm.
“Whole Foods is a company we look up to .. we’re flattered people think of us in the same way, they’re really inspirational retailers,” he said.
An Australian acquisition such as Harris Farm or Ritchies would give Amazon more clout with local suppliers, particularly in the fragmented fresh food sector.
The online juggernaut has already made contact with Australian food and grocery suppliers. According to a recent UBS survey, about 23 per cent of packaged food suppliers and 29 per cent of non-food grocery suppliers have been in contact with Amazon.