Beyond Amazon and Whole Foods: What’s next for the grocery sector?

raquel-martinez-96648.jpgAmazons pending $13.7B acquisition of Whole Foods Market is bound to disrupt the grocery sector, yet the deal is not the only thing changing the $5.3 trillion dollar industry.

To understand what the industrys change means for commercial real estate, its essential to examine both the Amazon deal and other shifting dynamics, including the growth of online shopping and expanding discount grocers. From Amazon to evolving customer habits, the grocery sector is experiencing unprecedented levels of disruption.

Amazon’s Whole Foods acquisition

Amazons takeover of Whole Foods will give the company, assuming the deal meets regulatory approval, about 460 brick-and-mortar locations. While its too early to know exactly how Amazon plans to position itself after the deal, the companys strategy is likely connected to Whole Foods distribution network and arsenal of physical locations. Quartz reported the deal gives Amazon physical locations within just a few miles of a third of Americas richest households. Wealthy Americans are among the top users of Amazons Prime service, and the deal promises to give Amazon easy access to these customers.

That access could do many things, and one possible scenario is an omnichannel combination of Amazons online offerings and in-store services. Those services include both goods available in-store and the possibility to pickup items ordered online, potentially even everything ordered online, not just groceries. Brent Franson, CEO of retail analytics firm Euclid Analytics, offered another possibility, and said the deal gives Amazon the opportunity to transfer its Prime members into a new Whole Foods benefits program. That program could make it possible to pay for groceries over Amazons app and even personalize the omnichannel experience by syncing an Alexa-made grocery list while shopping.

Changing consumer preferences and expanding foreign competitors

While Amazons Whole Foods acquisition could accelerate change in how consumers buy groceries, the deal did not launch that change. Consumer preferences have been shifting for some time.

Just like in other segments of retail, consumers want grocery shopping to become easier. That could mean ordering groceries online or simplifying the in-store process, but by looking at recent grocer performance, its clear the traditional model is not the key to success. Krogers stock is down about 35% for the year, and other grocers, including Costco and Sprouts Farmers Market, are struggling to grow in todays changing grocery environment. Not immune, Whole Foods watched its comparable-store revenues drop 2.5% in the 15 weeks ended April 30.

To cater to evolving consumer demands, Walmart, Kroger, Amazon and others already offer online grocery options. Moving one step further, Amazon recently pioneered its Amazon Fresh pickup locations for Prime members. The service lets customers order groceries online and reserve a time that day to have them loaded into their car. Amazon currently operates two locations in Seattle and plans to open more if they are successful.

To make matters more complicated for the grocery sector, German budget grocers Aldi and Lidl are expanding deeper into U.S. markets. Aldi announced in June it will invest $3.4B to expand its U.S. store count to 2,500 by 2022. Thats an additional 900 locations, and Fortune reported the move will intensify price competition and disruption in the industry. Aldi CEO Jason Hart said his chain plans to offer prices at least 21% below rivals, largely by relying on in-house brands. Lidl, another German budget grocer, recently opened its first U.S. stores and plans to open as many as 100 by the next summer. In May, Lidl said it will offer prices up to 50% lower than its U.S. rivals.

Grocery disruption and commercial real estate

The grocery sector is in flux. Amazons acquisition of Whole Foods could accelerate change by building omnichannel shopping experiences that accommodate shifting consumer demands. That trend may trigger store closures, especially if online grocery shopping heats up. At the same time, traditional grocers are likely to feel pressure from expanding discount chains as budget-minded consumers look for the best deal.

For the commercial real estate world, the direction the grocery sector evolves towards could signal several changes. If ordering groceries online becomes the norm, physical stores could suffer while food-specific warehouses and the logistical real estate that supports them succeed. On the other hand, if budget grocers win the grocery wars and online ordering remains a niche, grocery chains that offer uncompetitive prices will struggle while those that offer the best deals in the right neighborhoods will thrive.

Amazons deal to acquire Whole Foods is not complete and still needs to meet regulatory approval, but whether the deal goes through or not, the grocery industry is experiencing massive disruption. It is not clear what direction that disruption will take, or what it will mean for the real estate world, but from the growth of budget grocers to evolving consumer expectations, those who keep track of this changing industry will be best positioned to benefit.

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Topics: Industry News Disruption