Amazon.com Inc.'s purchase of Whole Foods Market Inc. isn't just a $13.7 billion bet that many shoppers still want to buy groceries at physical stores. It is a direct strike at the world's biggest retailer: Wal-Mart Stores Inc.
Wal-Mart generates more than half of its $486 billion in annual revenue from groceries and is the country's largest grocer. Shoppers' penchant for picking their own produce and the unprofitable nature of delivering fresh food to homes has given Wal-Mart a rare edge over Amazon and breathing room while ramping up its digital business with a string of e-commerce acquisitions and other investments.
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"I feel great about how we are positioned with 4,700 stores," Wal-Mart's e-commerce chief Marc Lore said Friday in an interview. "It's fun playing offense and I like the fact that we aren't chasing."
That edge may narrow for Wal-Mart and other retailers who have relied on a grocery advantage. In the wake of Amazon's acquisition, Wal-Mart shares fell 4.7% in Friday afternoon trading. Costco Wholesale Corp. dropped 6% while Kroger Co. slid 11.6%.
"This deal just accelerates where we thought the world was going with Wal-Mart and Amazon fighting over price, assortment, and convenience as titans for the next decade," said Brandon Fletcher, retail analyst at Bernstein in a research note.
On Friday morning, five minutes after Amazon's mega-deal was announced, Wal-Mart said it completed another small web purchase: It said it was paying $310 million for online menswear retailer Bonobos, known for its $98 chinos. It is the fourth small e-commerce acquisition for Wal-Mart this year and the latest salvo between the behemoths.
The rivalry heated up last fall as Wal-Mart bought Mr. Lore's startup Jet.com for $3.3 billion and put him in charge of its e-commerce operations. Mr. Lore, who had sold a previous startup to Amazon, vowed to use his Wal-Mart perch to take on Amazon.
Mr. Lore has since engineered a series of small acquisitions, adding niche online chains that appeal to wealthier or more fashion-forward shoppers than Wal-Mart's core customer such as Moosejaw and Modcloth. Wal-Mart has also ramped up efforts to use its stores to ship online orders. It is also expanding its online grocery pickup service to around a thousand stores and testing using store workers to deliver online orders on their way home from work.
Earlier this month Amazon took direct aim at Wal-Mart by discounting its Prime membership program for shoppers on government assistance, a core Wal-Mart cohort.
Wal-Mart executives have repeatedly cited their massive U.S store base as an advantage over Amazon. "Will it be easier for an e-commerce company to build out a massive store network and create a customer service culture at scale? Or are we better able to add digital and supply chain capabilities and leverage our existing stores?" Chief Executive Doug McMillon told investors in 2015. At the time, Wal-Mart discussed a plan to invest billions of dollars in online operations and stores, triggering a steep selloff in stock.
Since then Wal-Mart has put particular focus on improving the quality and selection of fresh produce and meat, adding new lighting and more organic food to the section, in part because those items are primarily bought in stores.
Only around 9% of households who shopped at Whole Foods in April also shopped at a Wal-Mart, according to data from Kantar Retail. "Outside of Texas, there just aren't that many areas that matter to Wal-Mart's grocery business that also matter to Whole Foods," said Bryan Gildenberg, analyst at Kantar. Still, Amazon could bring Whole Foods "to a much larger audience" over time, he said.
Wal-Mart's digital push is an extreme departure from its historical model of building hundreds of new stores each year to grow sales. The shift has ruffled some feathers internally and externally, say people familiar with the situation. Billionaire Warren Buffett sold off the majority of his long-held Wal-Mart stock in the wake of the shift.
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(END) Dow Jones Newswires
June 16, 2017 13:54 ET (17:54 GMT)