A secondary point of note was that the acquistion, assuming it clears the necessary regulatory hurdles, will provide a ready-made offline retail infrastructure for Amazon.
Or at least, it will in the domestic US market. Outside of North America, Whole Foods doesn’t have the same physical presence, having only a handful of stores in the UK, for example, where the online grocery business is a more mature proposition and where Amazon needs to scale up its offering.
One way to do that would be to replicate the Whole Foods acquisition strategy and snap up a local grocery firm. Two main candidates present themselves in the UK - Ocado, the online grocery innovator, and J Sainsbury's, the one-time hugely-troubled, but now seemingly in turnaround mode chain. Both have just published financials and, with a wary glance over at Amazon’s intentions, it’s going to be worth keeping an eye on the progress of both firms.
Over at Ocado, half yearly pre-tax profits fell by £1.7 million to £7.7 million, a decline attributed to opening costs of its third warehouse in Andover and investment in its hi-tech delivery and supply chain systems. Revenues grew 12.5% to £659.6 million while customer numbers were up 12.7% to 600,000.
For his part, CEO Tim Steiner calls the Amazon-Whole Foods deal as a “positive catalyst” for the entire sector, but also for kick-starting Ocado’s poor performance when it comes to selling its Smart Platform technology to other retailers. The firm last month announced it had signed an overseas deal with a European retailer, but this is limited in nature and the customer is not willing to be named at this point, making it difficult to assess the importance of the deal. Steiner says:
We continue to progress conversations with multiple retailers internationally to use the Ocado Smart Platform and believe that recent industry developments such as the announced acquisition of Whole Foods by Amazon will be a positive catalyst in advancing these discussions."Grocery retailing is changing and we are ideally positioned to enable other retailers to achieve their online aspirations.
He added that the Whole Foods takeover bid has led to much more interest in the Ocado proposition from US grocery firms:
We’ve seen increased interest from players in the US.
But he questioned whether Amazon actually has a fully-thought through strategy behind the Whole Foods purchase:
I think they just bought a player in the US that has a very high quality recognised brand name and recognised sourcing. I don't think they know yet what their model's going to be…I imagine they bought it as a stepping stone towards their future ambition.
As for the prospect that that ambition might involve buying out Ocado, Steiner would only comment:
We've never been trying to sell ourselves...It's not a focus of ours to try and sell the business.
Maybe not, but some retail analysts are increasingly vocal about Ocado’s best bet being to find a suitor. John Ibbotson of Retail Vision, is scathing in his assessment of the firm’s prospects:
The Ocado narrative rolls on, namely its revenues from selling groceries aren’t growing fast enough to recoup its astronomical set-up costs. Tim Steiner’s purported deal with a regional European retailer, signing it up to use its Smart Platform, isn’t the blockbuster deal that is needed.
Faced with gargantuan debts, Ocado’s greatest hope lies in finding a buyer for its technology. But this seems unlikely as it’s simply too expensive. It’s far harder to make online grocery pay when you pit hi-spec customer fulfilment centres and self-driving delivery vans against low-cost warehouses and low-paid humans.
Arguably Ocado’s greatest weakness has been to be too far ahead of the tech curve. Ocado needs a retail giant to buy up its tech or take it over, and soon.
Whether that is cue for Amazon to step forward is another matter, of course. As noted above, one benefit accrued from a successful Whole Foods purchase is the inheritance of an offline store infrastructure. An Ocado takeover wouldn’t deliver that to Amazon, which has led some commentators to believe that picking up a chain like J Sainsbury’s or Morrisons would be a better bet, although Amazon might still be tempted by the Ocado’s significant tech innovation.
As it turns out, Sainsbury’s has become something of a turnaround story, following CEO MIke Coupe’s controversial £1.4 billion decision to buy up catologue firm Argos. This has led to the opening of Argos click-and-collect outlets inside Sainsbury stores as well as a growing trend towards increased digital growth. CFO Kevin O’Byrne cites Fast Track collection as a case in point:
It's a growing part of the business, maybe 16% of the sales through the Argos channel. The interesting thing, this is becoming more and more digital business, with a very big percentage of the sales being ordered before people walk into stores. So only about 40% of the business is people walking in off the streets, where we didn't know they were coming and we didn't know whether they were going to buy. It's changing sort of literally, sort of month-by-month to be more online, more mobile, more digital.
The turnaround at Sainsbury’s driven by digital transformation is seen as “not far short of a Lazarus moment”, by Ibbotson of Retail Vision:
But this has been no lucky break – the CEO’s turnaround plan was painstakingly drafted and diligently executed. And this strong return to form is a vindication of the strategy and a testament to his vision and courage.
Sainsbury’s has done all the right things by integrating Argos into the business while simultaneously sticking to its strengths of innovation, quality and convenience in groceries.
Yet for now the integrated model is delivering in spades. Argos is no longer a ‘get out of jail’ for the struggling Sainsbury’s brand, but an equal partner in a truly impressive double act.
And one that might look rather tempting to Amazon perhaps?
The competitive landscape in the online grocery retail sector is only going to get more turbulent in the coming months. Assuming the Whole Foods deal closes, Amazon’s looming presence may indeed boost conversations between retailers and Ocado, but as Steiner notes, those conversations are slow-moving ones. Time is not on anyone’s side.