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Amazon’s grocery play is margin-squeezer

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Amazon’s closing of the Whole Foods Market acquisition this week is sure to add to brick-and-mortar retailers’ anxiety about the e-tailing giant’s ongoing march into traditional retail channels.

Speculation about a potential move by Amazon into the pharmacy space has disquieted drug chains and other retail pharmacy players. But the online retailer’s grocery market entry is already a reality. Market intelligence specialist Packaged Facts described Amazon’s Whole Foods buy and expansion of AmazonFresh as a “one-two punch” to the grocery sector.

For food retailers, the shorter-term hit from Amazon’s grocery push likely won’t come on the market share side but on margins, according to Packaged Facts.

“Will Amazon overtake the food and beverage market? No, but perhaps most importantly, Amazon’s major foray into food will surely stretch margins in an industry where they are already notoriously thin,” explained Packaged Facts research director David Sprinkle.

“This will in turn likely result in additional industry mergers and alliances geared toward managing costs,” he noted, “as other retailers seek to stay in the game with a competitor long known to absorb heavy losses over time in its quest for market share.”

Packaged Facts pegs Amazon’s online food and beverages sales at $1.5 billion last year and rising to $2.3 billion this year, which would give the e-tailer a 19% share of the online market. As Amazon leverages the addition of Whole Foods to spur multichannel expansion, sales growth of 70% in 2018 and 2019 is possible, the market researcher said.

Amazon’s estimated food and beverage sales in the 2018-2020 span “make only minor inroads” into overall food-at-home sales and would leave the company well behind market leaders Walmart and Kroger, Packaged Facts pointed out. Still, looking farther ahead, the researcher said that even average growth by Amazon from 2021 to 2025 would hoist its food and beverages sales well above $30 billion.

What’s more, growth in food sales likely will give a lift to Amazon’s sales in other categories. Packaged Facts said that any progress Amazon makes in the food segment will boost the value proposition of Amazon Prime, “giving more shoppers more reasons to buy three times products across categories.”


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