What happened
Shares of megaretailer Wal-Mart Stores (WMT 0.46%) sank on Friday following the blockbuster news that Amazon (AMZN -2.56%) had agreed to acquire Whole Foods Market (WFM) in a $13.7 billion deal. While Whole Foods' focus on the high end doesn't overlap much with Wal-Mart's focus on low prices, Amazon buying its way into the grocery business has investors fearing the worst. News that Wal-Mart had acquired start-up apparel company Bonobos was completely lost in the fray. As of 12:42 p.m. EDT, Wal-Mart stock was down about 4.5%.
So what
Wal-Mart is the largest seller of groceries in the United States, with a market share roughly double that of its closest competitor. The company has grown more aggressive with pricing in recent months, aiming to maintain its dominance. This grocery price war has caused problems for traditional supermarket chains, most notably Kroger, which warned yesterday that price deflation would hurt its earnings going forward.
Amazon has long been eyeing the grocery business, slowly rolling out its Amazon Fresh grocery delivery service over the past decade. But the acquisition of Whole Foods is a sign that the e-commerce giant is ready to go all-in on grocery. The grocery business is already being shaken up, with delivery and pick-up services gaining popularity. Wal-Mart has rapidly expanded its online grocery ordering service, offering it at over 600 locations.
Image source: Wal-Mart.
It's unclear what Amazon's intentions are with the Whole Foods acquisition. If the company maintains the premium pricing strategy that earned Whole Foods the "Whole Paycheck" moniker, Wal-Mart's grocery business may not be affected at all. But Amazon could use Whole Foods as a starting point for an aggressive land grab, slashing prices to gain market share and using the stores for delivery and pick-up services. The potential for that scenario, or something similar, seems to be what's driving down shares of Wal-Mart.
Now what
The grocery business is brutal, with razor-thin margins during good times, and the potential for rapidly falling prices due to intense competition during bad times. Whole Foods has been forced to cut its prices in recent years as mainstream competitors began offering more natural and organic items, and Amazon is now tasked with figuring out how to turn the business around.
The grocery business, already in upheaval by the growth of pick-up and delivery services, now has Amazon to contend with. Wal-Mart is in a strong position, with a dominant market share, an intense focus on offering the lowest prices, and a head start in online grocery. But Amazon's Whole Foods acquisition is certainly something for Wal-Mart investors to worry about.
