Price war: A car passes in front of a Whole Foods Market store in Illinois, US. Amazon now has control of more than 460 of the group’s stores. Picture: BLOOMBERG
Price war: A car passes in front of a Whole Foods Market store in Illinois, US. Amazon now has control of more than 460 of the group’s stores. Picture: BLOOMBERG

Chicago/San Francisco — When Wal-Mart Stores bought online retailer Jet.com for $3bn in 2016, it marked a crucial moment — the world’s largest brick-and-mortar retailer, after years of ceding e-commerce leadership to arch-rival Amazon, intended to compete.

On Friday, Amazon.com countered. With its $14bn purchase of grocery chain Whole Foods Market, the largest e-commerce firm announced its intention to take on Wal-Mart in the brick-and-mortar world.

The two deals make it clear that the lines that divided traditional retail from e-commerce are disappearing and sector dominance will no longer be bound by e-commerce or brick-and-mortar, but by who is better at both.

Amazon’s purchase of Whole Foods also brings disruption to the $700bn US grocery sector, a traditional area of retailing that stands on the precipice of a price war. German discounters Aldi and Lidl are battling Wal-Mart, which controls 22% of the US grocery market, with each vowing to undercut whatever price the others offer.

The stakes are highest for Wal-Mart. Amazon’s move aims at the heart of the retail giant’s business — groceries, which account for 56% of Wal-Mart’s $486bn in revenue for the year ending January 31.

With the deal, Whole Foods’ more than 460 stores become a test bed with which Amazon can learn how to compete with Wal-Mart’s 4,700 stores with a large grocery offering that are also within 16km of 90% of the US population.

Amazon is expected to lower Whole Foods’ notoriously high prices, enabling it to pursue Wal-Mart’s customers. The push comes as Wal-Mart is headed in the opposite direction — going after Amazon’s higher-income shoppers with a recent string of acquisitions of online brands such as Moosejaw and Modcloth and on Friday, menswear e-tailer Bonobos.

Wal-Mart may be ready. In preparation for the grocery price war, Wal-Mart in recent months has cut grocery prices, improved fresh food and meat offerings, modernised shelving and lighting in its grocery aisles, and expanded its online grocery pick-up service.

Marc Lore, the Jet.com founder who now runs Wal-Mart’s e-commerce business after selling a start-up to Amazon, told Reuters in an interview that Amazon’s move does not change Wal-Mart’s game plan. "We’re playing offence," he said.

Wal-Mart is offering curb-side pick-up of online grocery purchases at 700 locations, with 300 more planned by year end.

It also is testing same-day fresh and frozen home delivery from 10 of its stores.

Roger Davidson, who oversaw Wal-Mart’s global food procurement and now is president of Oakton Advisory Group, said the deal will reduce Wal-Mart’s brick-and-mortar advantage.

Amazon, which reported $12.5bn in cash and equivalents and a free cash flow of $10.2bn in the year ended March 31, has plenty to spend. Wal-Mart had $6.9bn in cash and equivalents and $20.9bn in free cash flow at its year ended January 31.

Brittain Ladd, a former senior manager at Amazon, said Amazon would use Whole Foods to test concepts for the grocery store of the future.

Reuters

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