On a recent Saturday afternoon, just days after Amazon dominated the news with its $13.7 billion purchase of Whole Foods, shoppers in San Antonio placed their all-natural food selections into carts with little thought to how that experience might change.
“It would be kinda cool if they put in more technology,” such as Amazon Prime Now‘s delivery service, Kori Newman said while shopping at the Whole Foods at Quarry Market. “… You can put stuff in your basket and it knows what you put in, like the Amazon stores that they opened in Austin.”
Most market watchers say Amazon’s acquisition of Austin-based Whole Foods could have wide-ranging implications for the grocery industry and its players, even beyond any benefits the merging companies find in working together.
One of those players is locally owned H-E-B. As one of the nation’s largest regional grocery retailers, operating more than 340 stores throughout Texas, H-E-B dominates the San Antonio and South Texas grocery market, competing mostly with Walmart. The Amazon acquisition could create an interesting dynamic for H-E-B.
“If it wasn’t already abundantly clear, Amazon and Walmart are gunning for one another, with this [acquisition] providing even more evidence,” according to an analysis of the deal in the trade publication Supermarket News.
“Amazon’s move could be seen as a defensive play and an acknowledgment that Walmart is on to something with the integration of physical and digital assets leading to its market-beating sales results in recent years,” the article states.
“Grocery, which generates frequent and habit-forming trips, has been central to Walmart’s strategy, visible in offerings like grocery pickup and experiments in potentially more cost-effective delivery strategies utilizing stores as distribution points.”
Last year, H-E-B got in that game as well, launching partnerships with Shipt and Instacart to offer the convenience of grocery delivery to its customers. The retailer also introduced an online “Ship to Home” service that delivers products anywhere in the world, and H-E-B curbside pickup also is available at some stores.
Thomas Tunstall, senior research director at UTSA’s Institute for Economic Development, said it surprised him when H-E-B was not mentioned in the press announcement and analysis following the Amazon acquisition. Even with H-E-B’s buying power, Tunstall reasoned the omission was due to the fact that H-E-B is privately owned and, thus, not required to share its quarterly earnings reports.
An H-E-B spokesperson declined the Rivard Report‘s request for an interview.
“H-E-B has been such a success at going head-to-head with Walmart, and it’s cool they have been able to do that,” Tunstall said. “But because they are privately held, there’s a lot we don’t know about how they have managed to do that, though it’s probably through aggressive deals with suppliers.”
Although H-E-B is known to have a loyal customer base, Amazon too brings a strong customer following, especially for people who like to shop online, Tunstall said. “They [Amazon] don’t know the grocery business, but they do understand the delivery business for non-food items.” And Whole Foods already has the food business figured out for them.
Many would argue that, in an industry where profit margins are slim, “America’s healthiest grocery store” has also been successful in building a following among shoppers who are willing to pay more for quality goods, or at least the perception thereof. And that mindset may have paid off for other grocery chains’ investments in higher-priced, all-natural goods, including H-E-B.
Mike, a self-described Amazon user who was shopping at Whole Foods last weekend, told the Rivard Report: “It’s expensive … [but] I’m fine with it. I don’t really know how it’s going to impact Whole Foods, but anything that makes services easier and more cost-effective, I’m down for.”
“Whole Foods’ quality is superb, but their growth [has] stalled because it has been going after that upper niche,” Tunstall said. “They do understand brick-and-mortar, but Amazon seems to target a broader market. And that’s where it’s possible, when they engage Whole Foods to do that, if they can find a way to broaden their market without impacting their image for quality, then they might make a go of it.”
Many companies have been successful at that. Tunstall named Toyota as one example, broadening its market from budget-friendly Corollas to the luxury-car Lexus. And, in fact, H-E-B essentially did the same with its upscale Central Market stores, the first of which opened in Austin 23 years ago. There are nine Central Markets now in the state, the most recent one having opened in Dallas.
“The trick [to being successful] is just being thoughtful about it, not rushing, because there’s not a magic bullet,” Tunstall said. “You have to experiment, run a pilot, and build on your success.”
That kind of approach to business is another of Amazon’s strengths. “[CEO] Jeff Bezos is willing to take risks, and not all of his ventures have panned out,” Tunstall said. “If this does pan out, then one of the implications for H-E-B is that they’ll have to look at possibly developing that business model themselves.”
The other advantage the purchase of Whole Foods gives Amazon is a ready-made food distribution network in strategic locations around the country. This is attractive because Whole Foods stores are typically located where there are higher numbers of upper-middle and upper-class consumers.
“For Amazon, this is an entry into the grocery space,” said Matt Speed, a Houston investment advisor. “It removes a barrier for them to that one person who wants to buy everything from one place.”
Meanwhile, European grocery chains are making inroads on U.S. soil. German discounter Lidl is currently building regional distribution centers in Maryland, Virginia, and North Carolina to serve its smaller, no-frills stores opening in that region.
According to Supermarket News, Lidl reps have also scouted Texas. The company’s motto: Rethink Grocery.