Amazon is getting into retail in a big way by buying Whole Foods.
It’s Goliath vs. Goliath.With their dual acquisitions on Friday, both Amazon.com and Wal-Mart Stores Inc. moved to buy their way into new markets, picking up different skills, clout and customers along the way as they battle for the future of American retailing.It’s their market and everyone else is just trying to do business in it — and catch up in terms of size, speed and digital retail savvy.Amazon's $13.7 billion cash agreement to buy Whole Foods Markets Inc. was by far the bigger and bolder move – and, given its scale, potentially the more risky. The deal eclipses the $11 billion merger of Federated Department Stores and May Co. in 2005 and will give the e-commerce company 460 brick and mortar stores, a higher-end brand, access to new vendors, a refrigerated supply chain and a big entrée into grocery — a space long-protected by Wal-Mart because it drives traffic to its stores.Wal-Mart, meanwhile, extended on its $3.3 billion bet on Jet.com and its founder, Amazon ex-pat Marc Lore, and agreed to acquire Bonobos Inc. for $310 million in cash. Andy Dunn, founder of the bottoms-heavy brand, will fall into place as senior vice president of digital brands, reporting to Lore and overseeing Wal-Mart’s digitally native vertical brands, including Bonobos and Modcloth.Although the deals are extremely different in size, it’s significant that they are both cash transactions. This is a battle of giants, where price tags and the availability of financing don’t matter nearly as much as strategic vision.Lore has been on a spending spree at Wal-Mart, also buying Shoebuy and Moosejaw, working to beef up the Jet.com and walmart.com offering and, along the way, driving Wal-Mart’s first-quarter e-commerce sales up 63 percent.Asked in an interview with WWD on Friday how he felt about Amazon’s Whole Foods deal, Lore didn't address that directly, instead giving an indication of Wal-Mart's new strategy toward competing with Amazon: Going on the attack. “I feel really good about how we’re positioned right now," he said. "With Bonobos, it’s all about playing offense.”Lore said he’s empowered Dunn and his team to keep the brands separate from the overall Wal-Mart retail organization, at least for now. “If it makes sense for brands to live on Jet, they will,” he said. “Andy believes there might be a place for Bonobos on Jet. Modcloth and Bonobos are offensive plays. Their margin structures are very attractive.”[caption id="attachment_10917726" align="alignnone" width="296"] Marc Lore[/caption]The Bonobos deal is part of a bigger e-commerce strategy that has Wal-Mart vastly expanding its assortment while building expertise in apparel and home.Asked about additional acquisitions (which are widely expected by bankers and other retail experts) Lore and Dunn changed the subject to Bonobos – and again emphasized the "offense" word.“We’ll be playing offense in digital apparel,” Dunn said. “Wal-Mart made two really important acquisitions in the apparel space with Bonobos and Modcloth. I’ve long been a huge fan of Modcloth and dreamed that some day Bonobos and Modcloth would be under the same roof. We get to go aggressively after the long tail of the digital brands.”Dunn said Bonobos’ partnership with Nordstrom will continue and likely expand. The brand is sold in all of Nordstrom’s 118 doors.“We’re a massive chino resource at Nordstrom,” he said. “We’re now in button-down shirts and we’re starting to distribute to Nordstrom our opening price point suits. We’re green lighting Bonobos for sale on Nordstrom.com. We’re excited to get on Jet.com as well.”In terms of Bonobos’ showroom-store hybrids called guide shops, the brand is on track to open more than 15 units this year. “We’re focused on the guide-shop strategy,” Dunn said. “It’s not traditional retail. It’s a marketing vehicle for a digital property. It’s for a one-on-one experience.”Modcloth operates a single store in Austin, Tex., which claims to have changed the way women shop. “If it’s working you do more,” Lore said, noting that he hasn’t researched the unit yet. “Andy will dive in.”Lore is surrounding himself with lots of digital fashion talent, including Dunn and Jenny Fleiss, the Rent the Runway cofounder who is now chief executive officer of Code Eight, the first portfolio brand of Wal-Mart’s tech incubator, dubbed Store No. 8.They are two of the lieutenants bringing fashion knowhow to Wal-Mart’s battle with Amazon, which is only going to get fiercer.Laura Champine, managing director with Roe Equity Research, said Amazon’s Whole Foods deal is a threat not just to mainline grocers, but also other large retailers."It does impact the big-box retailer because it's just another way Amazon has to tie into a customer's daily purchasing,” Champine said. “That puts pressure on Wal-Mart, because it can reduce the number of trips to the big-box stores and that's the concern. Also, it gives them more leverage with the vendors and that's something they know how to exploit.”In the matchup between Wal-Mart and Amazon, Wal-Mart’s brick-and-mortar advantage will be slightly diminished by the Whole Foods deal – even though Wal-Mart has literally 10 times the number of stores as Whole Foods: 4,672 to 460. Most of Wal-Mart's stores are in rural areas, while Whole Foods is in more higher-income urban/suburban locales."Amazon has contemplated at length how well they can do in grocery without owning assets, and this represents a decision they've made on that,” Champine said. “It really heats up that war between these two."Mortimer Singer, ceo of Traub, added: “There's no question in anyone's mind that Wal-Mart and Amazon are major competitors, if not the competitors right now. An interesting question is, do they still see themselves as mass-market businesses? I don’t think they do. I think they're both trying to provide value across the value chain and up the demographic ladder. There are really no channels any more, it's all about the customer, and you can speak to a mass-market customer and a luxury consumer now.”Singer noted that about 30 percent of Whole Foods’ business is made up of nonperishables, including beauty and some apparel.“Given their desire to double down on Amazon Fashion, I think there's a possibility they start doing more there, like in Canada and Europe, you have these hyper-markets that have both food and fashion,” he said. “That's very much not an American phenomenon at all, but you might see them start to bring in their own brands to the spaces, those that make sense with the Whole Foods brand. It's sort of a Trojan Horse for [Amazon] to get to a certain type of customer. In a small way, this will allow people to have a physical touch point for Amazon and it could spell the beginning of more things like this to come.”The Whole Food deal signals that Amazon founder Jeff Bezos believes in the very retailers he’s disrupted, although no doubt he’ll have a different take on brick-and-mortar and perhaps one that proves instructive. Bezos bought The Washington Post as a personal investment and has been given high marks for his impact on the organization. He’s also built up Amazon’s cloud computing business into a powerhouse and has a spaceflight company, Blue Origin, that is literally shooting for the moon.[caption id="attachment_10917727" align="alignnone" width="346"] Jeff Bezos[/caption]Gaurav Gupta, a principle with M&A consultants Kotter International, said of the Amazon/Whole Foods tie-up: “Partly it’s a response to the fact that Amazon doesn’t really have physical retail space, but it is a sensible next step in some other ways. For a while, it was everything was going online and to digital and physical retail was thought to not matter that much, but now it's clear consumers do want to touch and feel product and Amazon needs this retail space to continue to diversify their product offering.”Both the Amazon and Wal-Mart deals underscore a theme that’s become common in retail — the combined power of bricks and clicks.“The future of retail is clearly physical retail and e-commerce combined,” said Ed Yruma, managing director with KeyBanc Capital Markets. “Wal-Mart has an incredibly strong store fleet and they’ve kind of awoken e-commerce and they’ve been doing well. It shows what you can get with stores and e-commerce combined.”Yruma likened the Whole Foods deal to Amazon’s 2009 move to buy Zappos.“It buys them access to a new supply chain and access to a market they’ve had difficulty tapping into,” he said. “One of Whole Foods' strongest attributes is its supply chain and its access to really interesting vendors that Amazon doesn’t have right now. It’s got emerging apparel brands, emerging beauty brands and look, when you get Whole Foods, you get those things, too.”But in entering brick and mortar food retail, Amazon is diving into a space that already is intensely competitive - and only about to get more so as German deep discounter Aldi has revealed plans to substantially expand in the U.S. and its rival Lidl is about to enter the American market. The sector also is one with very thin margins already, made even thinner by the fact that food price inflation has remained stubbornly low for years.On top of that, Whole Foods has faced a string of woes over the last few years, and has struggled against its pricey image that had consumers nicknaming it as "Whole Paycheck." While its organic and sustainable products work well in urban and suburban markets, most of the company's rivals have substantially upped their offerings in those areas and thus blunted Whole Foods' advantage. As for beauty, the retailer will continue to face the ongoing growth of Sephora (also through J.C. Penney) and Ulta while its mass market and drugstore rivals – from Wal-Mart and Target to CVS – are already stepping up their organic and natural offerings.Still, never underestimate Amazon – or Wal-Mart, for that matter.Bahige El-Rayes, a principal in A.T. Kearney’s consumer and retail practice, said, “Amazon’s strategy is about owning consumer involvement in every aspect of the consumer’s life, whether through Echo, Dash or Prime. Now with the move to grocery, they are showing they are serious about grocery. People will still go to the grocery store, but what Amazon is doing is reinvigorating what it means to be omnichannel and what it means for convenience.”He said that’s going to force traditional retailers to double down on e-commerce and do whatever they’re doing, faster.“Clearly Amazon and Wal-Mart see each other as a threat, and they are both moving to put stakes in the ground in each other’s territories,” said Richard Kestenbaum, an investment banker in the retail and apparel space at Triangle Capital. “They both have different approaches, based on their different histories and resources, even though both have enormous financial scale.”But it’s too early to say who will be the winner. They both are continually evolving.“It will be many years before Amazon or before Wal-Mart will vanquish the other,” Kestenbaum said. “And there will be many, many changes that will take place. We will probably never see one be the winner or one defeat the other.”More from WWD:
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