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About five years ago I began to write an Insight article tentatively entitled, “Should Walmart buy Amazon or should Amazon buy Walmart?”

I never finished the article but it came back to mind on Friday when Amazon announced that it had made an offer to buy the beleaguered Whole Foods Market.

Once Amazon announced the offer, publicly traded grocery stocks dropped in price by roughly 5-10%. The stock price drop included both Walmart and Target. This was due to concerns by the investment community that Amazon would now impact the grocery market as effectively as it has books, paper goods, clothing, and many other retail segments.

The clear strategy behind Amazon’s purchase of Whole Foods has yet to be announced by Amazon. My guess is that it is not to continue Whole Foods current strategy of offering overpriced and supposedly natural foods. (For doubters on that last statement, check the ingredients of soy products made to look like meat. These labels read like a chemistry quiz.)

The obvious strategy behind such a purchase is to use Whole Food’s traditional retail stores and distribution to deliver groceries to consumers who have ordered on-line. If Amazon is successful in this effort, it will significantly affect the grocery retail market as effectively as it has changed the retail market in many other segments.

Traditional retail has been and continues to be under attack by Amazon and other innovative competitors. Retailers who are stuck in a strategy with stores in traditional enclosed shopping malls are in a spiral to eventual liquidation. As an example, The Limited abandoned the shopping malls to go online only but then quickly shut down its online operations as well.

Macy’s, Dillard’s, Sears, and JC Penny shrink every year, putting off their final demise until investors can harvest what little value is left in them. Even Target and Walmart, who are not tied to the antiquated indoor shopping mall model, have been impacted and are having trouble growing.

A comparison of Amazon to Walmart and their sales growth is enlightening. Walmart’s sales are almost three times those of Amazon. But Walmart’s sales growth for the last five years has been 0.2%. That is, almost no annual sales growth.

During the same five years, Amazon’s sales have more than doubled, growing from $61B to $136B. Sales have grown between 20 and 27% each year. Imagine the growth possible if Amazon successfully penetrates the grocery market. Perhaps this is why Amazon’s stock value went up by more on Friday than the amount it is spending to buy Whole Foods.

Beyond the immediate impact of Amazon’s action on the grocery market lies the question, “What does Amazon’s action mean to all traditional retailers?” Or, stated in a broader way, “How much of retail will ultimately be controlled by Amazon and other on-line retailers?”

In answering that question, it is interesting to look at what has happened to retail since Walmart and other discounters and category killers began to rise in the late 1980s. Big Box retailers such as Walmart, Home Depot, Best Buy and many others, forced many small retailers out of business and began the decline of mall-based retailers.

However, since Amazon started attacking the bricks-and-mortar book stores, it has moved progressively from one industry to another. There is ultimately a limit to how much of a market can move to online. But we are a long way from the peak of online retail sales.

As an example, while most airline reservations are made online, there is still a role for value-added travel agents. Ultimately, some buyer’s needs – such as convenience or the ability to try out products – cannot be accommodated online.

Getting back to grocery, penetrating this industry has proven thus far to be a difficult challenge for Amazon. It has built an online grocery business in some cities in the Northwest but has not achieved overwhelming success. But remember that Jeff Bezos and the other executives at Amazon are extremely smart. They would not complete the purchase of Whole Foods without having a plan that will disrupt grocery retail in a significant way.

Finally, what is the answer to the question posed at the beginning of this article? The answer is neither. Walmart would likely never be able to get Amazon’s board to agree to a purchase. And Amazon just demonstrated that it doesn’t need Walmart. It has gained access to national food distribution by buying Whole Foods for $14 billion, about 6% of the current value of Walmart.

In closing, imagine a time, not too far away, where you place an order for your grocery needs for the week from your computer, phone or tablet. Last week’s list is stored and available for editing. Your favorites are listed under a tab in your browser window. New products based on your prior purchases are visible in the margins as you finalize your order. Promotions based on your history are also presented to you. You click on a few of the choices offered, go to the checkout, and pay for your order.

Your groceries are delivered in the evening shortly after you get home from work. No going out in the heat or the cold. No traffic. No fighting the parking lot. No walking with your cart behind pokey shoppers. No long checkout lines or automated checkout machines that lock up each time you try to buy produce.

Buying groceries. Almost as easy as buying a book!
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