Correction to Amazon-Whole Foods, Grocery Services Story Thursday

By Heather Haddon and Julie Jargon Features Dow Jones Newswires

Even before Amazon.com Inc. put a supermarket chain in its cart, U.S. grocery delivery services were racing to grab hold of new regions, spending millions to gain a larger share of the fast-growing market.

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Now, with the e-commerce giant planning to buy Whole Foods Market Inc. for $13.7 billion, giving it a large foothold in the food retail industry, the stakes are all the higher for companies such as Instacart Inc., Peapod LLC, Shipt Inc. and FreshDirect LLC to deliver not only fresh food -- but continued growth.

Midwestern grocery chain Schnucks Markets Inc. is expected Thursday to announce its partnership with Instacart for online delivery will extend to most of its 100 stores by next month. Ahold Delhaize's Peapod is expanding its push into New York City, a key market, after spending more than $94 million on a warehouse in Jersey City, N.J., in 2014.

Shipt, which delivers food orders for retailers including Costco Wholesale Corp., Meijer Inc. and Whole Foods, intends to almost double its markets by next year, from 51 to 100. Founder Bill Smith says the company's expansion is targeting suburban customers in less saturated regions like the South and the Midwest to gain an edge.

The largest U.S. food sellers, Wal-Mart Stores Inc. and Kroger Co., meanwhile, are testing delivery services using Uber Technologies Inc. and Lyft Inc.

It isn't clear whether Amazon acquiring Whole Foods will remake grocery shopping in much the same way the company has changed book-buying.

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Concentrated in cities and surrounding suburbs, grocery delivery is still a small business, accounting for less than 2% of last year's $715 billion in food-retail sales, according to food-services research and consulting firm Technomic Inc. Amazon already makes up more than half of online food orders through its Fresh, Prime and Prime Now services.

Seventy percent of respondents to a survey by supply chain consulting company AlixPartners LLP last year said they had no intention of having groceries delivered. Grace Herrera, a 59-year-old caregiver in California, said she'd rather spend time shopping than pay extra for delivery. "I have time to go to the store," she said.

Margins also remain an issue. Razor-thin to begin with, they've dropped in recent years as falling food costs sparked a price war. And in the online world, the learning curve for how to sell fresh foods has created an added drain.

Ocado Group PLC, the biggest online grocer in the U.K. and one of the few public ones, posted its first full year of profits in its fiscal year ending in November 2014 and averages transaction sizes of $140 per order, compared with $32 for the typical brick-and-mortar supermarket, according to Barclays Capital Inc. About 07% of in annual sales of Ocado's fresh produce is wasted, a drag on margins and far worse than a traditional grocer's average of 3%, the firm found.

Still, delivery is one of the fastest-growing segments of an otherwise sluggish supermarket sector. Online sales of consumables grew by 21% in 2015 over the previous year, according to the Willard Bishop grocery consulting firm.

The planned partnership between Amazon and Whole Foods is a new challenge for delivery services vying for that growth, said Bill Bishop, co-founder of Brick Meets Click, an e-commerce grocery consulting firm. Whole Foods' 466 stores could serve as mini-distribution centers in densely populated, affluent areas; Amazon, which has demonstrated a willingness to forgo profits for years to build up market share, could use its e-commerce prowess to cut the specialty grocer's prices to near those of its competitors.

"This gives them another way to drive up penetration in grocery purchasing and ultimately delivery," Mr. Bishop said.

Peapod executives say that being owned by a large retailer like Netherlands-based Ahold Delhaize allows the delivery service to bargain with suppliers for lower prices. They add that Peapod is profitable in markets where it has operated for at least a decade.

"We are the original online grocers and have outlasted many of the competitors who have come and gone," said Jennifer Carr-Smith, chief executive of the Skokie, Ill.,-based company, which was founded in 1989 and took its first orders by fax.

FreshDirect didn't respond to requests for comment.

Brick-and-mortar supermarkets are wrestling with whether to invest in their own delivery services, cede profits to startups or risk losing more business to Amazon. For grocers who use Amazon Prime to deliver to their customers, the Whole Foods deal presents a particular challenge.

Natural health-food chain Sprouts Farmers Markets Inc. will continue to use Prime to deliver groceries for now, said Bradley Lukow, chief financial officer for the Phoenix-based company. "We'll make the determination going forward if we want to make any changes," he said at an industry conference last week.

Schnucks chief marketing officer Andrew Nadin said the grocery chain was planning to expand its partnership with Instacart even before Amazon set out to buy Whole Foods.

"We've never tried to out-Wal-Mart Wal-Mart. We won't try to out-Amazon Amazon," he said.

Instacart, founded by a former Amazon engineer, aims to be able to deliver to 80% of U.S. households next year, up from 69% today. In addition to stores like Wegmans Food Market Inc. and Target Corp., Instacart currently handles deliveries for Whole Foods. Analysts expect that to end.

Instacart wouldn't comment on its partnership with Whole Foods.

"Amazon is here," said Nilam Ganenthiran, Instacart's chief business officer. "Grocery retail is going to have to respond."

--Laura Stevens contributed to this article.

Corrections & Amplifications

Story corrected at 9:16 p.m. Original cited data from a Barclays Capital Inc. report that incorrectly said about 30% of Ocado's fresh produce is wasted daily.

Even before Amazon.com Inc. put a supermarket chain in its cart, U.S. grocery delivery services were racing to grab hold of new regions, spending millions to gain a larger share of the fast-growing market.

Now, with the e-commerce giant planning to buy Whole Foods Market Inc. for $13.7 billion, giving it a large foothold in the food retail industry, the stakes are all the higher for companies such as Instacart Inc., Peapod LLC, Shipt Inc. and FreshDirect LLC to deliver not only fresh food -- but continued growth.

Midwestern grocery chain Schnuck Markets Inc. is expected Thursday to announce its partnership with Instacart for online delivery will extend to most of its 100 stores by next month. Ahold Delhaize's Peapod is expanding its push into New York City, a key market, after spending more than $94 million on a warehouse in Jersey City, N.J., in 2014.

Shipt, which delivers food orders for retailers including Costco Wholesale Corp., Meijer Inc. and Whole Foods, intends to almost double its markets by next year, from 51 to 100. Founder Bill Smith says the company's expansion is targeting suburban customers in less saturated regions like the South and the Midwest to gain an edge.

The largest U.S. food sellers, Wal-Mart Stores Inc. and Kroger Co., meanwhile, are testing delivery services using Uber Technologies Inc. and Lyft Inc.

It isn't clear whether Amazon acquiring Whole Foods will remake grocery shopping in much the same way the company has changed book-buying.

Concentrated in cities and surrounding suburbs, grocery delivery is still a small business, accounting for less than 2% of last year's $715 billion in food-retail sales, according to food-services research and consulting firm Technomic Inc. Amazon already makes up more than half of online food orders through its Fresh, Prime and Prime Now services.

Seventy percent of respondents to a survey by supply chain consulting company AlixPartners LLP last year said they had no intention of having groceries delivered. Grace Herrera, a 59-year-old caregiver in California, said she'd rather spend time shopping than pay extra for delivery. "I have time to go to the store," she said.

Margins also remain an issue. Razor-thin to begin with, they've dropped in recent years as falling food costs sparked a price war. And in the online world, the learning curve for how to sell fresh foods has created an added drain.

Ocado Group PLC, the biggest online grocer in the U.K. and one of the few public ones, posted its first full year of profits in its fiscal year ending in November 2014 and averages transaction sizes of $140 per order, compared with $32 for the typical brick-and-mortar supermarket, according to Barclays Capital Inc. About 07% of in annual sales of Ocado's fresh produce is wasted, a drag on margins and far worse than a traditional grocer's average of 3%, the firm found.

Still, delivery is one of the fastest-growing segments of an otherwise sluggish supermarket sector. Online sales of consumables grew by 21% in 2015 over the previous year, according to the Willard Bishop grocery consulting firm.

The planned partnership between Amazon and Whole Foods is a new challenge for delivery services vying for that growth, said Bill Bishop, co-founder of Brick Meets Click, an e-commerce grocery consulting firm. Whole Foods' 466 stores could serve as mini-distribution centers in densely populated, affluent areas; Amazon, which has demonstrated a willingness to forgo profits for years to build up market share, could use its e-commerce prowess to cut the specialty grocer's prices to near those of its competitors.

"This gives them another way to drive up penetration in grocery purchasing and ultimately delivery," Mr. Bishop said.

Peapod executives say that being owned by a large retailer like Netherlands-based Ahold Delhaize allows the delivery service to bargain with suppliers for lower prices. They add that Peapod is profitable in markets where it has operated for at least a decade.

"We are the original online grocers and have outlasted many of the competitors who have come and gone," said Jennifer Carr-Smith, chief executive of the Skokie, Ill.,-based company, which was founded in 1989 and took its first orders by fax.

FreshDirect didn't respond to requests for comment.

Brick-and-mortar supermarkets are wrestling with whether to invest in their own delivery services, cede profits to startups or risk losing more business to Amazon. For grocers who use Amazon Prime to deliver to their customers, the Whole Foods deal presents a particular challenge.

Natural health-food chain Sprouts Farmers Markets Inc. will continue to use Prime to deliver groceries for now, said Bradley Lukow, chief financial officer for the Phoenix-based company. "We'll make the determination going forward if we want to make any changes," he said at an industry conference last week.

Schnuck chief marketing officer Andrew Nadin said the grocery chain was planning to expand its partnership with Instacart even before Amazon set out to buy Whole Foods.

"We've never tried to out-Wal-Mart Wal-Mart. We won't try to out-Amazon Amazon," he said.

Instacart, founded by a former Amazon engineer, aims to be able to deliver to 80% of U.S. households next year, up from 69% today. In addition to stores like Wegmans Food Market Inc. and Target Corp., Instacart currently handles deliveries for Whole Foods. Analysts expect that to end.

Instacart wouldn't comment on its partnership with Whole Foods.

"Amazon is here," said Nilam Ganenthiran, Instacart's chief business officer. "Grocery retail is going to have to respond."

--Laura Stevens contributed to this article.

Corrections & Amplifications

Story corrected at 9:16 p.m. Original cited data from a Barclays Capital Inc. report that incorrectly said about 30% of Ocado's fresh produce is wasted daily. This story was corrected again on July 3, 2017 at 11:28 a.m. ET because the original version misspelled Schnuck Markets' name.

About 0.7% in annual sales of Ocado Group PLC's fresh produce is wasted. "Amazon's Whole Foods Deal Adds Pressure on Grocery Services to Deliver" at 5:30 a.m. ET Thursday cited data from a Barclays Capital Inc. report that incorrectly said about 30% of Ocado's fresh produce is wasted daily.

Schnuck Markets Inc. announced its partnership with Instacart for online delivery will extend to most of its 100 stores. "Amazon's Whole Foods Deal Adds Pressure on Grocery Services to Deliver" at about 5:30 a.m. ET Thursday misspelled Schnuck Markets' name. July 3, 2017

(END) Dow Jones Newswires

July 03, 2017 11:42 ET (15:42 GMT)