When Amazon.com (NASDAQ: AMZN) enters a new industry, it's often assumed existing players may be wrecked. Many times there's good reason for this sentiment, but not always. On this note, Amazon's acquisition of Whole Foods Market may not lead to its total domination of retail and groceries that many initially assumed.
The purchase of the organic foods supermarket by Amazon is undoubtedly a big deal, as it gives the e-commerce retailer an immediate nationwide footprint that it can expand upon. So it wasn't completely unreasonable for investors to send shares of existing grocery store chains like Kroger and SUPERVALU lower in the immediate aftermath of the announcement, because Amazon is well-known for its willingness to spend a lot of money -- and generate a lot of losses -- to build up a critical mass and ultimately own a space.
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Yet not every venture for the e-tailer works out as expected -- the Fire Phone, anyone? -- and some of the fretting may have been overblown.
A hidden weapon
The Whole Foods acquisition isn't likely to be a failure by any stretch, but it also may not be as fatal for retailers as some initially feared.
Unbeknownst to many, retailers like Target (NYSE: TGT), Bed Bath & Beyond (NASDAQ: BBBY), and Best Buy (NYSE: BBY) have clauses in their leases that give them control over space in their malls, limiting competitors from opening up or selling certain merchandise.
An investigation by Reuters found that across the country, Whole Foods is precluded from selling certain merchandise like electronics, toys, and certain home goods. Other leases ban installing Amazon Lockers, where the e-commerce retailer's customers can go pick up merchandise they bought online.
Because almost all of Whole Foods' 470 stores are covered by leases, Amazon may run into a major roadblock in making the grocery store its vehicle for reshaping the industry. Target reportedly is blocking Whole Foods from opening at a City Center mall in San Francisco; Bed Bath & Beyond is preventing it from selling linens, bathroom items, and home goods in New York City; and Best Buy restrictions at a Miami mall limit only up to 250 square feet that can be dedicated to selling electronics by other tenants.
Sure, investors in Blue Apron are right to worry that meal kit delivery specialist's shallow competitive moat may quickly be overrun by Amazon.com with its own service, but it turns out a number of legacy retailers still have a few arrows in their quiver they can shoot to keep their rival away (at least temporarily).
Resistant to change
The grocery business is ripe for reinvention, and though online grocery sales have grown since the days of Webvan during the dot-com boom, even Amazon.com has found the going difficult. It recently announced it would be shutting down its AmazonFresh grocery delivery service in a number of neighborhoods across five states.
Still, melding the offline grocery store space with the online is a huge opportunity, and Whole Foods could be the vehicle for Amazon.com to do so. The industry researchers at Packaged Facts see Amazon leveraging Whole Foods into total food and beverages sales that soar "well past $30 billion" by 2025, up from an estimated $1.6 billion last year.
Although they also see the synergies leading to greater sales in Amazon's other retail spheres, that's only if the e-tailer can transform how it uses Whole Foods. If the competition has any say in the matter -- and right now, they do -- that might not be so easy to achieve.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.