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Are Amazon's Brick-and-Mortar Plans in Trouble?

By Leo Sun - Nov 5, 2017 at 7:11AM

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Retailers are negotiating long-term leases that could cripple the company's ambitious strategy for Whole Foods.

Amazon's (AMZN 0.25%) takeover of Whole Foods stunned many brick-and-mortar retailers, which feared that merging Amazon's e-commerce ecosystem with hundreds of physical stores could render traditional supermarkets and superstores obsolete.

Amazon already slashed prices at Whole Foods, started selling Echo speakers in stores, and plans to add pickup lockers to some locations and Whole Foods products to Prime Now, its two-hour delivery program. Those plans should pay off as Whole Foods stores become pickup and delivery hubs for groceries and online orders. That combo would make Prime memberships even more attractive with special discounts.

An Amazon fulfillment center.

An Amazon fulfillment center. Image source: Amazon.

However, big box retailers aren't sitting idly by waiting for their greatest rival to take over the market. Instead, they could rely on real estate agreements to limit what Amazon can do with nearby Whole Foods stores.

Landlords stuck in the middle

Real estate companies generally lease out large properties like strip malls to a wide range of retailers. Their profits can only keep growing if those tenants stay in business and keep paying the rent.

Many Whole Foods stores are located in strip malls and shopping centers, and analysts expect Amazon to shrink many of those stores, only using them to sell fresh produce or other products that need to be seen and touched. Meanwhile, the company will store other consumable products in its fulfillment centers, shipping them directly to customers for online orders.

Amazon's locker locations across the US.

Amazon's locker locations across the US. Image source: Amazon.

That's great for Amazon, but it'll hurt neighboring stores -- landlords will see their rents decline and disappear as tenants go out of business. As a result, many leases between landlords and retailers -- which can last 10 to 20 years -- stipulate that landlords can't lease properties to certain tenants (like strip clubs) which might hurt their business, or start new construction projects without their approval.

Some leases also name competitors which are banned from opening nearby stores. If retailers aim those bans at Amazon and Whole Foods, its plans for expansion could quickly hit a roadblock.

Target takes steps to block Amazon

Target (TGT 1.26%) recently required one of its landlords, an affiliate of Regency Centers, to ban "any lockers, lock-boxes, or other type of storage system that is used to receive or store merchandise from a catalog or online retailer" at Pinecrest Place Mall in Miami.

A woman checks her smartphone while shopping.

Image source: Getty Images.

Target also requested a ban on using any store as "a fulfillment center in connection with receiving, storing, or distributing merchandise from a catalog or online retailer." Reuters reports that Regency agreed to those terms, so the new Whole Foods store at the center will be banned from installing Amazon lockers or fulfilling Prime Now orders.

Target is also using similar strategies against Amazon in stores in Illinois and California. That's likely because Target depends heavily on grocery sales (21% of its revenue in the first half of 2017), and about 7% of Whole Foods' US stores are located within a quarter mile of the nearest Target.

Other retailers are doing the same

Target isn't the only retailer negotiating "anti-Amazon" clauses into its leases. Earlier this year, German grocery chain Lidl negotiated lease agreements that blocked "the operation of pickup facilities" by rivals like "Wal-Mart and Amazon" near its planned store on Long Island in New York.

A Bed Bath & Beyond store in Manhattan negotiated a lease that bars a Whole Foods next door from selling linens, bathroom items, housewares, and frames. A Best Buy store north of Miami previously secured the exclusive right to sell electronics in a shopping center -- but a subsequent lease "carve-out" (which let tenants sell gadgets on less than 250 square feet of floor space) still allowed a Whole Foods to display Amazon's Echo speakers.

Are retailers just delaying the inevitable?

Amazon bulls probably think that retailers like Target are merely delaying the inevitable with these lease negotiations. However, such agreements indicate that retailers and landlords aren't willing to let Amazon storm in and put neighboring stores out of business.

The company will likely find a way to work around these hurdles, either through carve-out leases of its own or property acquisitions. But until that happens, Amazon's industry-dominating plans for Whole Foods will face challenges as retailers buy some time to expand their own online and pickup offerings.

 

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