Whole Foods deal is expected to put further pressure on
already-slowing sales
By Annie Gasparro and Laura Stevens
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the US print
edition of The Wall Street Journal (June 27, 2017).
Amazon.com Inc.'s deeper push into the grocery business
threatens to further pinch packaged-food companies already coping
with slowing sales.
An enduring shift by consumers toward fresh and natural options
is eating into the business of big food brands, like Kraft Heinz
Co., Kellogg Co., and Mondelez International Inc. They also face
growing competition from store brands and upstarts.
Now, Amazon is preparing to expand into the sector with its
proven history of aggressively driving down prices.
Amazon's deal to buy Whole Foods Market Inc. for $13.7 billion,
including debt, was disclosed about six weeks after its first
meeting with executives. Because the deal came together so quickly,
Amazon hasn't yet had the time to develop a complete strategy,
according to people familiar with Amazon's thinking. But the
company is likely to leverage its negotiating expertise and the
combined scale of the business to push for lower prices from
suppliers, they said.
Amazon "will keep squeezing national brands on pricing," said
James Thomson, a former senior manager in business development at
Amazon and now partner at brand consultancy Buy Box Experts.
Amazon's initial priority will likely be to lower Whole Foods'
operating costs so that it can charge less for groceries, in hopes
of winning more customers, according to the people familiar with
the company's thinking.
Amazon and Whole Foods declined to comment for this article.
Whole Foods Chief Executive John Mackey told employees earlier
this month that one of Amazon's core values was "frugality,"
hinting at a greater focus on cutting costs and lowering prices for
shoppers.
Whole Foods' sales have suffered over the past two years, partly
because of a perception among shoppers that its offerings are too
expensive.
"If Amazon steers Whole Foods away from its 'whole-paycheck'
image, and successfully sells Whole Foods' products online, then
'Big Food' faces the threat of losing even more market share," said
Rabobank food analyst Nicholas Fereday.
Mondelez's comparable sales in North America declined by 1.9% in
its most recent quarter. Kraft Heinz's U.S. comparable sales fell
3.5%, and Kellogg recently lowered its 2017 comparable sales growth
forecast to negative 3%, excluding currency rate fluctuations. Most
packaged-food companies have turned to cost-cutting to boost their
profit margins .
Amazon has worked on developing its own private-label, and last
year made a big push into perishable food. Analysts and former
employees expect the company to use Whole Foods to build out its
own labels and capitalize on the grocer's success with its 365
brand, which accounted for 15% of its most recent fiscal year's
sales.
Amazon's Whole Foods deal could also widen the reach of natural
and organic brands by putting them online, making them more
competitive with traditional, ubiquitous brands.
Alexander Pease, chief financial officer of pretzel maker
Snyder's-Lance Inc., said at a conference last week that the deal
would generate another "level of discussion with [retailers] around
price."
But Susquehanna Financial Group analyst Pablo Zuanic says Amazon
and Whole Foods' combined share of about 4% of U.S. grocery sales
hasn't enough "clout" to hurt big food companies in the way of
bargaining power.
It could also take time before food makers start feeling
pressure, because the deal hasn't been completed, and Amazon's
strategy for Whole Foods could shift, the people familiar with the
company's thinking said. The deal is expected to be completed later
this year.
Companies such as PepsiCo Inc. and Mondelez, which have
top-selling brands and a global presence, are best positioned to
withstand the impact of a combined Amazon and Whole Foods, some
analysts said.
But mainstream brands with less market share are likely to get
squeezed by niche organic options on the high end and private-label
copycats on the low end, they said.
UBS analysts see Campbell Soup Co. and Conagra Brands Inc., two
less diversified players which are already facing big problems as
consumers move away from packaged-foods, as some of the companies
that could suffer most from the combination of Amazon and Whole
Foods. Campbell's comparable sales fell 1% in the latest quarter.
Conagra's comparable sales fell 4.8% in its last reported
quarter.
"We enjoy good working relationships with both Amazon and Whole
Foods and expect that to continue," a Campbell spokeswoman said.
Conagra declined to comment.
In the past, Amazon has been willing to lower price tags at the
expense of margins to gain traction in a new market. Amazon's stock
has risen even when profits didn't, indicating investors' patience
with the company's strategy to push for long-term gains.
Mr. Thomson the former Amazon manager, said that in its
bread-and-butter online retail business, Amazon has taken a tough
stance to match or beat competitors, even if that meant prices
dropped below a brand's minimum. The company also typically
attempts to negotiate lower prices with brands each year, he
said.
And when it comes to private label, "Amazon will move much
faster at building new brands than any national brand can today,"
Mr. Thomson said.
Write to Annie Gasparro at annie.gasparro@wsj.com and Laura
Stevens at laura.stevens@wsj.com
(END) Dow Jones Newswires
June 27, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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