“The ultimate food fight” didn’t mean much to me last week when I came up blinking from the dingy cellars of the Trump administration’s goings-on and the sub-basement of US-Russia relations.
Amazon, it turned out, had bought Whole Foods for $13.7 billion in cash, the online shopping pioneer thus becoming the nation’s fifth-largest grocery retailer overnight. The deal had “sent shock waves” through the grocery business, The New York Times reported. It “instantly transformed the online giant into a major player in the bricks-and-mortar retail sector it has spent years upending,” reported The Wall Street Journal.
I had begun my day purchasing a $3 container of salad greens at Market Basket, the New England grocery chain that made headlines a couple of years ago when its employees rallied around one of two cousins battling over control. One of its 78 stores is located a ten-minute walk from my house.
But I read the details of how Whole Foods had grown from a single store in Austin, Texas, in 1978 to the largest natural foods supermarket chain in the United States; of activist investors’ role in forcing its sale; of how Amazon timed its purchase nearly perfectly (Kroger had announced disappointing sales a few days before, sending share prices down throughout the industry): it came back to me how interesting the business world is. I rejoiced to see how sharp and thorough the coverage was. The Times mentioned in three separate stories that Gabrielle Sulzberger, a private equity executive and its publisher’s wife, had helped arrange the sale.
The deal was said to set up a much-anticipated battle between Amazon and Walmart for dominance of the retail sector. Both companies appeal to their customers by offering low prices, great variety, and relative convenience. They compete on their ability to negotiate lower prices from their vendors, and thus offer lower prices to their customers. Thus Walmart did become the nation’s largest grocery chain, with more than half its $486 billion in 2016 coming from that line of business. Buying power is half the story; continual re-investment in logistics is the other. The same principle of increasing returns to scale turned Amazon into the nation’s largest seller of books, and, increasingly, purveyor of all manner of other retail goods. Amazon sales last year were $136 billion; Whole Foods revenues were $15.7 billion.
But there’s a big difference between the two companies. Walmart, founded by Sam Walton in Benton, Arkansas, in 1962, has 11,700 stores and clubs in 28 countries, 4,600 of them in the United States. Walmart grew enormous by following the US system of Interstate highways as they were built – Walton himself would scout locations from the little airplane he piloted – just as ninety years before a bookkeeper-turned-merchant named Huntington Hartford grew rich following railroads across the nation. Hartford joined Great Atlantic & Pacific Tea Co. in 1861. In the 1950s the multi-billion-dollar grocery chain rivaled General Motors.
By then, newer groceries chains more in tune with the automotive age had begun flanking the A&P by moving to suburban malls. Walmart topped them by building bigger stores with lower prices in more central locations.
Amazon, on the other hand, founded by Jeff Bezos in 1994 as an online retailer, opened its first bricks-and-mortar outlet, a bookstore, only a couple of years ago. It has another ten or so stores in the works, and last year it opened a pair of experimental drive-through facilities in Seattle, from which customers could pick up groceries they had ordered online, according to the Times. With Whole Foods, Amazon acquired 460 locations in relatively prosperous and densely-populated neighborhoods. Think of them as mini-warehouses rather than food stores. Expect a chess game of further acquisitions to ensue in coming years. Walmart Friday announced it would buy Bonobos, a ten-year-old men’s clothing retailer, for $310 million.
Information and communications technologies are retrofitting the cities. Congestion is troubling the suburbs. Walmart is a formidable competitor, but chances are it will find itself prisoner of its installed base at the junction of superhighways, much as A&P became captive to relatively small groceries across from train stations
It’s just a hunch, but the coming grocery war between Amazon and Walmart may prefigure even more far-reaching changes in real estate prices, as those who can afford to continue to move back to cities, where lines of communication are shorter. I’ll keep going back to Market Basket as long as I can. But one day I expect I’ll be getting my salad greens and vitamins, as well as my books, delivered by Amazon. Via drones? I have my doubts. But Bezos has plenty of room for mistakes.