Amazon.com Inc. gave the business journalism world a dozen headlines in June when it entered into an agreement to acquire organic grocery chain Whole Foods Market Inc. for a cool $13.7 billion. The move likely appeased Whole Foods’ shareholders, who had been laying siege to the company’s executives for relatively poor performance, but moreover it served as a harbinger of significant disruption in the grocery market. And though it’s not a done deal and another company can enter the bidding—Wal-Mart Stores, Inc. appears to be the likely candidate, at least in terms of another retailer—stocks of both companies’ competitors suffered. Stores that have the most geographic and market overlap with Whole Foods should be wary.
It’s not entirely clear what Amazon hopes to accomplish through the acquisition, but their ambitions in the food supply chain are obvious. The partnership can facilitate brick-and-mortar ubiquity as well as provide a new source of ever-valuable consumer data. The move has also spurred a handful of think pieces about an incipient Amazon monopoly. But while the big news about the deal has already been covered, there’s still territory to cover. We asked market specialist (and businessjournalism.org contributor) Scott Gurvey for clarity.
Sign of a sea change?
Many in the journalism world are painting this as a pivotal moment in the retail world—and it very well might be. But it’s important to remember that market disruption is not unique to the Silicon Valley age, Gurvey said.
“The fact of the matter is, the markets in the U.S. in particular have gone through these revolutions over and over and over again,” Gurvey said. “Mom and Pop stores were scared off by regional grocery stores. And then there were the Costcos and Walmarts.”
And Walmart will probably stick around.
“Walmart’s got a lot of resources, they just need to make their online ordering work,” Gurvey said.
Give it time
Regardless of the company’s intent, Amazon may very well help the market as much as it exerts further control over it.
“These companies tend to improve efficiency in the market,” Gurvey said. “This may simply stimulate the market a little bit.” Currently, for example, “Amazon will deliver fresh food and groceries within hours or overnight if you’re in Manhattan, but not when you’re in Montclair, New Jersey.”
In other words, rolling out improved grocery delivery will take time. As journalists learned the hard way in recent elections, not every American lives in an urban, densely populated area. It may still be more efficient to go to a nearby grocery store than to resign yourself to Jeff Bezos-approved kale delivered by drone.
It’s easy for writers to fall into the trap of assuming the worst, but they should remember: If it seems too good (or headline-making) to be true, it probably is. Is Amazon entering territory where regulators will have to consider an antitrust action? Unlikely, Gurvey said, at least in the U.S.
“U.S. antitrust law is consumer-focused,” he said. “You don’t want a company to become the only player in the market. The trick is defining what the market is, and then you have to look to see what’s going on with the prices of the goods.”
In Gurvey’s eyes, Amazon doesn’t have majority control in any market—retail, video, home audio and certainly not grocery. Just because it’s expanding doesn’t mean there aren’t other options, he said, and that’s key. Although European antitrust law is geared toward protecting companies from each other, its legal counterpart in the States generally seeks to prevent harm to the consumer. That means a company would need to have so much control that it could jack up prices without fear of losing business.
“Every time Amazon gets involved in these things, prices have gone down,” Gurvey said. “Are individual stores going to be hurt by this? Maybe. But people have survived without being big suppliers to Amazon.
“If I were a journalist, I’d almost look and see if Amazon has benefited consumers in the U.S. by becoming so prolific,” he said.
The future of futures
With Whole Foods’ financial health likely on the mend, should wise investors bet on second-order jumps in other markets, like commodities? Should we all be buying up soy and chia seeds?
“On the major commodity markets, probably not,” Gurvey said.
He said it’s important to understand that business decisions don’t always correlate directly to changes in the market, at least not immediately. But, even if that impact isn’t felt from the get-go, a democratization of organic goods that could come from the acquisition will likely bolster those types of commodities later down the line. Food that isn’t chock full of preservatives will complement Amazon’s instant delivery goals.
“If Bezos is operating on a business model where almost instant delivery is part of his business plan, that lends itself perfectly to the organic, non-preservative type of food product,” Gurvey said.
• Reporters should understand that antitrust law in the U.S. is applied in very specific circumstances with a high burden of evidence. Prosecuting Amazon in the press is not only pointless, it’s potentially inaccurate.
• Look at the history. This may be Amazon’s biggest acquisition and a major change in the market, but it’s important to remember that the grocery industry has been around for a while and it has survived disruption before. Moreover, not everyone may buy what Amazon is selling, literately and figuratively, in terms of delivery.
• Look down the line. Yes, the move will impact stocks of other companies, but think about how those changes manifest in less obvious ways; in this case, it would be prudent to look at the impact on agricultural businesses and suppliers to the chain.