One year after Amazon.com Inc.’s (AMZN, Financial) purchase of Whole Foods, the predicted apocalypse in the natural food and grocery store business seems to have been delayed.
For many natural food grocers, sales and traffic are both up, as well as share prices that fell upon news of the online retail giant’s entry into the business. Instead of eating into their profits, many of these companies have seen growth.
According to retail data firm Spins, sales at Natural Grocers (NFVC, Financial), Sprouts Farmers Market (SFM, Financial) and other natural and health food stores have seen increases in dollar and unit terms over the previous year. The growth rate has doubled at Thrive Market, a natural and organic online grocery website, according to CEO Nicholas Green.
Some of these organic foods stores that compete with Whole Foods are owned by large companies such as Kroger (KR, Financial) as an inroad to the health foods market. Many stores lowered prices after Amazon’s purchase; other stores have always maintained lower prices than Whole Foods, long prior to Amazon’s purchase.
Many other natural grocers have instituted better customer service in the last year as well as stocked more local products. Smaller grocers and natural food stores have not stood on their laurels. Many have adopted by accelerating planned investments in online delivery and in-store pickup services.
Implementation of this business strategy is similar to Target’s (TGT, Financial) successful response to Amazon by using the large number of its stores and offering same-day pickup to compete with the e-commerce giant's online retail presence.
That business model has yielded visible results as well as recent stellar quarterly earnings. There is no reason to doubt that stores in the grocery business cannot similarly adopt and thwart any attempts by Amazon to achieve sector dominance.
The predictions that Amazon would soon be a formidable, if not dominant, force in the grocery business seem to have been exaggerated. Skeptics should consider the following.
On the news that Amazon was entering the grocery business with its purchase of Whole Foods last summer, shares of grocery stores dropped precipitously. The market value of some six large grocery chains, including Kroger and Walmart (WMT, Financial) declined by $12 billion.
A year later, Kroger's stock is up almost 20%, shares of Sprouts are up 20% and Natural Grocers stock has increased by two-thirds.
Many Wall Street analysts seem predisposed to immediately put shares of companies in a sector Amazon enters on the chopping block. Far too many investors overreact to the news, auspiciously presenting opportunities for value investors to buy on the selloff.
The moral of this story?
Other companies, be they department stores or traditional grocery store chains, can coexist with the online behemoth. Survival requires adaptation and creative strategies, but contrary to the predispositions of many biased analysts, it doesn’t mean other companies within an industry that Amazon enters are doomed to extinction.
Another advantage Amazon has enjoyed and that helped facilitate its dominance in the online retail sector was its leveraging of its enormous database capabilities to track and monitor what its customers purchase. The company is using this same in-house data warehousing strength from its web services division to help grow its Whole Foods strategy.
Smaller grocers now have the ability to avail themselves of these same customized data capabilities long enjoyed by Amazon, by partnering with the company's principal cloud services competitor, Microsoft (MSFT, Financial).
Disclosure: I have no positions in any of the securities referenced in this article.
