Amazon.com Inc.'s acquisition of Whole Foods may have unsettled many in the grocery space, but the deal likely poses a threat to only some food retail and real estate players, experts say.
Observers are still guessing at the long-term impact Amazon will have on the low-margin grocery business. The space has already weathered rounds of disruption over the last quarter-century, as discounters have entered the market in force and as the business has spread into new niches like drugstores.
Wal-Mart, a relative newcomer to the grocery space, is currently the country's No. 1 grocer, having deposed old mainstays such as Safeway and Kroger.
Value has a strong pull, and dedicated value players like Costco and overseas discounters Aldi and Lidl are unlikely to lose market share to Amazon and Whole Foods, according to Bill Bishop of Brick Meets Click, a long-time adviser to the retail food industry.
At the other end of the spectrum, high-end regional operators like Wegmans and Kings in the mid-Atlantic and New England, and Bristol Farms in California, inspire deep brand loyalty. These operators have woven themselves into the lives of communities, and they will not be dispatched easily, experts say.
Where Bishop and others see a potentially significant shake-up is the middle market serviced by grocers like Kroger, Albertsons and Harris Teeter. As Amazon reduces prices of organic produce that may have been out of reach, consumers who have historically shunned Whole Foods will be tempted to at least to try what they have been missing.
"The traditional [middle-market] grocer — they're the ones who are going to be hurt and go into the price wars," Phil Lempert, a long-time industry observer and founder and editor of SupermarketGuru.com, said.
On the real estate side, both Bishop and Lempert see real risk for the real estate investment trusts that serve as landlords to the grocers. Bishop cited the increased rate of impairment among grocers at lower-quality centers as the business has been pulled in different directions by discounters and online offerings.
Lempert has recommended that grocers and landlords not pursue leases longer than five years. The market is too dynamic to bet long-term on even a class-A, urban location that a Whole Foods today might occupy.
"If I put a Whole Foods someplace today, I don't know whether or not the neighborhood is going to reflect what a Whole Foods stands for five years from now," Lempert said.
BTIG analyst Michael Gorman, who covers REITs but has particular expertise in retail, was, like Bishop and Lempert, skeptical about Amazon's ability to grab significant market share in the near term. There is already significant overlap between the Amazon Prime and Whole Foods customer base, he said.
"I think they will take some market share, but the idea that it's going to kill the other major grocers in the market seems a bit of a stretch," he said.
Gorman meanwhile was moderate in his analysis of the deal's impact on real estate.
"Does it mean we should be more careful in real estate selection? Yes. Do you want to see high-quality names in dense markets? Yes. But does it spell the end of the rest of the national grocers? That is where we think it's just a step too far at this point," he said.
Amazon CFO Brian Olsavsky on a recent conference call hinted at several possible trajectories for the company's grocery business while discussing the future of AmazonFresh, the delivery service that, paradoxically, was designed to replace the consumer's trip to the grocery store. Amazon Go, the company's prototype grocery store, is still confined to a single location.
"I would say we believe there will be no one solution," Olsavsky said of Amazon's grocery business. "So we're experimenting with a number of the formats, from physical pickup points in Amazon Go to online ordering and delivery to your door through Prime Now and AmazonFresh. And we'll see how customers respond."
Lempert sees in the Amazon-Whole Foods deal signs of deep — and encouraging — structural change on the way, via the arrival of a Silicon Valley mindset to a business defined by well-worn concepts. He called the marriage "invigorating" and "re-energizing," insofar as it brings a new managerial ethos to bear on a stagnant industry.
"It makes working as an executive in a grocery chain cool and hip," he said of the deal. "We're going to attract a whole different way of thinking."