Amazon.com's (NASDAQ:AMZN) recently announced acquisition of Whole Foods Market has other retail stocks running scared. Companies like Wal-Mart and Target Corporation dropped close to 5% the day of the announcement. On the other hand, Procter & Gamble (NYSE:PG) shares were up just a bit on the day.
Does that make any sense? Not in my book. P&G's 65 consumer brands are facing a battle if Amazon attacks the grocery aisles with the same gusto it has used for its other merchandise. Keep in mind P&G sells about 44% of its products in North America and 15% of its products directly to Wal-Mart Stores.
Once upon a time...
In February 2014, P&G announced a deal with Amazon to help cut costs. The company let Amazon take up residence at some of its distribution centers so P&G products could be shipped directly to Amazon customers instead of P&G having to ship to or stock an Amazon warehouse. The relationship caused a tiff with Target, which felt jilted as one of P&G's prime retail outlets.
Even today, a quick check of Amazon's best-sellers turns up many P&G brands. Crest, Pampers, and Tide, to name a few, are all No. 1 in their respective categories on Amazon's site. That is good news for P&G, right?
It may be -- for now. But what lies down the road?
The tide may be changing
Amazon encourages brands such as P&G to sell its products through Amazon. Initially, this gives P&G access to all Amazon shoppers -- not a trivial matter considering that 52% of U.S. households now buy products through Amazon Prime.
On the other side of the coin, this gives Amazon vast amounts of data as to what its shoppers are buying. Amazon knows what you buy, how much you buy, when you buy, and what you pay for the product. By controlling the relationship with the consumer, Amazon prevents P&G from knowing the end user's buying habits and can begin to plot out its own brand strategy and how to convert the consumer to buying Amazon private label brands.
What happens when you combine Amazon private labels with AI?
Last year, Amazon introduced its line of artificial intelligence (AI) home products in the form of the Amazon Echo and Amazon Dot.
These devices can be used by Amazon to disrupt companies like P&G.
Here is how Scott Galloway, brand expert and the founder of L2, a company that focuses on brands, sees it: "The way Amazon monetizes things is through commerce, so it's likely we are going to see a huge effort on the part of Amazon to turn Alexa into a frictionless and brandless means of ordering all the stuff you need in your household."
In other words, when you want baby wipes, the first product the Amazon device will ask you to buy is Amazon Element baby wipes -- and the price will be less than the comparable P&G Pampers product.
Amazon will be able to sell its products for less than traditional brands, which have grown up in a brick-and-mortar world. Companies like P&G have costs that Amazon does not have. Such as, paying retailers for shelf space, retailer relationships, marketing, advertising, and in-store promotions and partnerships. All cost savings that Amazon can pass directly back to the customer through lower pricing of its products.
Now let's throw in Amazon owning shelf space at 460 Whole Foods stores and having physical pickup locations all over the country. This will allow the company to further its private-label strategy by familiarizing more consumers with Amazon brands such as Presto laundry detergent or Amazon Elements baby wipes.
What will P&G do?
The Whole Foods acquisition is scheduled to close in the second half of the year. Investors will have to wait to see how things turn out.
It is a matter of record that P&G has been losing market share and is seeing its annual revenue decline. In an effort to remedy that, last year the company announced a plan to cut costs by $10 billion over the next five years. Traditionally the company has been focused on returning money to shareholders through dividends and share buybacks. P&G may just have to start thinking about using some of those savings to cut prices for consumers, who stand to be the biggest winners in what looks like a coming war of the brands.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Frank DiPietro owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Whole Foods Market. The Motley Fool has a disclosure policy.