Amazon's $13.7 billion acquisition of Whole Foods — an effort to conquer groceries, one of the only categories the online behemoth has not yet successfully translated online — is a direct challenge to Minnesota's biggest food retailers.
Shares of Minneapolis-based Target Corp., for whom groceries make up about a fifth of sales, fell about 5 percent on Friday after the deal was announced. Eden Prairie-based Supervalu, the parent of Cub Foods, saw its stock tumble about 14 percent. Other grocers also felt the pain — Kroger's shares dropped about 9 percent and Costco's about 7 percent.
The reverberations on Wall Street were a sign that investors see the deal as an indicator of big changes in how and where consumers will shop for groceries in the future.
Analysts expect that Amazon will slash grocery prices, a notable change for Whole Foods, a chain whose high prices prompted the unofficial nickname "whole paycheck." The price cuts will likely pressure other competitors to follow suit, edging into profits in an already thin-margin business at a time when Walmart has already been lowering prices and low-cost grocer Aldi plans to open hundreds more stores in coming years.
"This is only going to accelerate that pricing issue," Moody's Vice President Mickey Chadha said. "This is going to reverberate across the space."
Not only that, but the move also gives Amazon access to a footprint of 450 stores in desirable locations at a time when it has begun dabbling with opening retail concepts.
Other retailers should "be terrified," said Matt Sargent, senior vice president of retail for Bloomington-based consulting firm Magid. "I don't think that's an overreaction. The storm has been brewing for awhile, and it's finally here."
He added that Target could be one of the most vulnerable because its shoppers are more likely to be members of Amazon Prime than those who shop at Walmart. The acquisition also cuts into one of Target's core advantages compared to Amazon — its physical stores located close to where people live.
Imagine if Amazon begins adding books or its newer private-label fashion lines inside Whole Foods, Sargent said.
"That begins to sound like a Target," he said.
In a statement, Target did not directly address the Amazon acquisition but emphasized its ease and convenience.
"Part of what differentiates and drives preference for Target is that we provide guests the ability to shop multiple categories conveniently, from exclusive offerings in beauty and fashion to essentials and food," the company said.
Target's grocery business has been one of its weak spots in the past year as overall company sales have also slid. It has been adding more organic and gluten-free items to its aisles and sprucing up its produce displays while still struggling to find a more distinct grocery positioning in the market.
Earlier this year, Target hired Jeff Burt, a former Kroger executive who headed up its Fred Meyer division, to be its new grocery chief.
Food and beverage is a "key category" that customers want to find at Target, the company said. "As we've shared, we are on a journey to create a differentiated experience in food and beverage. While the work won't be done overnight, we are committed to getting it right for the long term and are encouraged by the progress that we are making."
Supervalu declined to comment.
"Target and Walmart are right in Amazon's cross hairs," said Brian Yarbrough, an analyst for Edward Jones. "They already were, but their one saving grace was that Amazon hadn't figured out grocery. This is going to change the retail landscape pretty quickly."
While it has much more easily penetrated markets such as consumer electronics and apparel, Amazon hasn't had an easy time with groceries. It has a fresh grocery delivery offering in a handful of markets called Amazon Fresh, but it hasn't been a huge success.
The selection has been limited, and Amazon didn't have much cachet in the category, said Gene Munster, a Minneapolis-based analyst and investor with Loup Ventures.
"They weren't trusted in food," he said. "That's a big thing. People want to actually see the tomatoes. Now you have somebody [Whole Foods] who is trusted so you may not have to actually see the tomatoes."
With this deal, he added, "Amazon put the flag down. Overnight, they have a brand in food."
In recent months, Amazon has begun testing drive-up pickup locations for groceries and a store without cashiers called Amazon Go in its hometown of Seattle. Munster said he expects to see Amazon implement some of the automated concepts from its Amazon Go store into Whole Foods over the next few years.
And in the next year or two, he predicted Amazon will begin integrating grocery delivery from Whole Foods into its Prime Now service.
Target, Cub Foods and others have been dipping their toes into grocery delivery through outside partners such as Instacart. Whole Foods has also been a big Instacart partner. Only about 1 to 2 percent of grocery shopping is done online today, analysts say, but that could soon change.
"The market response says it all," Munster said. "Amazon put the hammer down. These companies — Target and Supervalu — are probably thinking that Whole Foods is a high-end customer, but they're mistaken if they're thinking that Amazon's ambition in food is going to end with high-end organic. This is going to evolve into a much broader strategy for Amazon" to capture a big chunk of the $500 billion food market.
Staff writer John Ewoldt contributed to this report.
Kavita Kumar • 612-673-4113
