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Up the river? Not so fast

Amazon’s purchase of Whole Foods poses what Loblaw’s Galen G. Weston calls a “very different and compelling” threat to established grocers, but experts believe several factors could mitigate the damage

Amazon’s US$13.7 billion purchase of Whole Foods Market is expected to have a seismic impact on the North American grocery sector, although experts believe we’ll see nothing more than a few minor tremors in the early going.

Guelph-based analyst Kevin Grier says any new competitor, particularly one as powerful as Amazon, poses a threat to incumbents such as Loblaw and Metro. However, he adds that the Amazon/Whole Foods partnership is unlikely to change the balance of power in Canadian grocery as long as brick-and-mortar stores remain the dominant shopping channel.

Amazon may be unrivalled online, but Grier says e-commerce still represents an “extraordinarily small” part of Canadian grocery (less than 1% of the $120-billion industry, according to Queen’s University Investment Counsel’s Canadian Grocery Market Report). And with just 13 stores in Canada—most located in Toronto and Vancouver—Whole Foods is a minnow compared to behemoths like Loblaw and Metro.

“It’s hard to be overly concerned about putting the two of them together,” says Grier. “[E-commerce] is probably going to grow, but the rate of growth will be very slow. Canadians don’t seem to be too interested in Internet grocery shopping.”

READ: Amazon’s appetite for disruption

Loblaw Cos. Ltd. chairman and CEO Galen G. Weston acknowledged Amazon as a “very different and very compelling” threat to Canadian grocers during an August analyst call, but said he expects Loblaw to benefit from “five or six years” of market intelligence on the impact of these new business models on its U.S. counterparts before they arrive here.

Weston also noted that, with some exceptions, Amazon has largely failed to completely eradicate established players in the new categories it has entered.

“[It’s] not because these formats or these concepts are not incredibly powerful and incredibly innovative,” said Weston. “It’s because the retailers who are facing these threats respond. They make strategic changes, they take costs out of the business, they change the way that they meet customer demands, and you should expect us to do similar things.”

Other prominent CEOs share Weston’s view that the so-called “Amazon Effect” has been overstated. “I think the impact is probably a little overplayed in terms of the magnitude and speed with which it might effect the overall industry,” said outgoing Mondelez International CEO Irene Rosenfeld in an interview on CNBC’s Squawk on the Street in August.

But Phil Lempert, a California-based grocery expert known as “the Supermarket Guru,” says Amazon’s expansion into grocery adds an element of cool to what has been a relatively staid business.

“The same way that Amazon has hacked book selling … this is what we’re going to see come to the grocery world,” says Lempert.

Amazon has been coy on how it plans to integrate Whole Foods, but Lempert predicts its first move will be lowering prices—particularly since the retailer’s reputation for high prices (exemplified by the enduring nickname “Whole pay-cheque”) doesn’t jibe with Amazon’s value proposition.

READ: One month in, what’s changed at Amazon’s Whole Foods?

He predicts Amazon will also transform Whole Foods locations into pick-up depots for its 10-year-old AmazonFresh grocery service. It will also install Amazon lockers in those locations, enabling customers to pick up other products they’ve purchased from Amazon on their way out of the store.

Lempert calls these changes the “low- hanging fruit” for Amazon, predicting it will be anywhere from 18 to 24 months before it begins incorporating some of the technology it uses in its online business in the grocery retail space.

IGD Canada program director Stewart Samuel predicts e-commerce will be one of the first things Amazon focuses on in Canada, pointing out that Whole Foods stores are perfectly suited to serve as pick-up locations for AmazonFresh or a similar service.

Bill Bishop, a principal in U.S. consultancy Brick Meets Click, says Amazon’s arrival could create some urgency among Canada’s established grocers to bolster their e-commerce operations, which have traditionally lagged behind those of their U.S. and European counterparts.

That still may not be enough to prevent Amazon from using its e-commerce expertise to corner the online market. According to Bishop, one way the incumbents could compete is by improving in-store experiences, whether through intangibles such as enhanced customer service, or more visible changes such as enhancing their deli sections or fresh departments.

This article originally appeared in Canadian Grocer‘s September issue

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