The retail note - 22 June 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
5 minutes to read
- Sainsbury’s has emerged as the frontrunner to buy Nisa Local in a deal that could be worth £130 million. Nisa’s 1,400 members own and operate 2,500 c-stores across the UK, generating profits of £7.3 million last year. Sainsbury’s interest has an element of “me too” about it, given Tesco’s proposed (but far from certain) takeover of Booker. Given the nature of Nisa, a mutual where member stores hold shares in the business, any deal will need a majority (75%) of shopkeepers to agree.
- Healthfood chain Holland & Barrett has been put up for sale by US owner NBTY, with a reported price tag of £1bn. Asian health and beauty giant AS Watson, owner of Superdrug, Perfume Shop and Savers in the UK, has made an indicative offer for the business, which has around 1,400 stores in 16 countries.
- Weak full-year figures from value clothing operator Bonmarché. Pre-tax profits declined 39.4% to £5.8m in the year to April, with like-for-like sales falling 4.3%. Total revenue increased by 1% to £190.1m. The business opened a net 15 new stores/concessions during the year (including six in garden centres) to take the store count to 327 by the year-end.
Stephen Springham, Head of Retail Research:
Physical stores generally (and supermarkets in particular) have been given the ultimate vote of confidence from the unlikeliest of sources. Supposed high street tormentor-in-chief Amazon is to fully traverse the divide into store-based retailing through the $13.7 billion purchase of Whole Foods. This marks further blurring of the lines between physical and digital retail and underlines our long-held belief that the future of retailing in neither online nor bricks & mortar – it is both. And the end game for all retailers, whatever their roots or origin, is to make the shopping experience as seamless as possible.
Was the Whole Foods deal a surprise? On the one hand, the news was a complete bolt from the blue when it broke on Friday. It had not been widely touted and Amazon’s imperious rise has historically been built upon organic expansion and diversification into new categories, as opposed to large-scale acquisitions. On the other hand, perhaps we should have been less surprised. If Amazon is serious about being a force in grocery retailing, it was never going to achieve this alone through Amazon Fresh. It was always going to need external partnership in some form – an all-out acquisition of a major store-based player was an option, but more of a long-shot than a likelihood.
There is considerable strategic logic in the deal. There is substantial customer cross-over between Amazon Prime membership and Whole Foods’ shopper base. The latter has a substantial 400+ store physical footprint across the US, but is largely an online novice. In contrast, Amazon’s general online know-how and infrastructure are, of course, second to none. But for all their complements, there are still key gaps – neither has significant experience, as yet, of online grocery retailing, which is very different from general merchandise online retailing. Amazon is only feeling its way in certain markets with Amazon Fresh and Whole Foods doesn’t bring any additional expertise in this market. Ocado, on the other hand, most certainly would – watch this space?
This deal is primarily a North American play – this is where Whole Foods has the vast majority of its stores. Online food retailing generally is at a less developed stage Stateside than it is in some parts of Europe and Asia, so it follows that this is where the greatest “disruption” (to use popular parlance) will be felt.
What of the impact in the UK? The level of “disruption” will be far smaller, at least initially, as both Whole Foods and Amazon Fresh are small in scale in the UK. Whole Foods has hardly blazed a trail since it first entered the UK in 2004, often struggling to achieve profitability and expanding to just nine sites. Annual sales are estimated to be ca. £120m - about the same as one of the largest Tesco Extra stores. Amazon Fresh has an even more limited audience, serving only Amazon Prime members in 300 odd postcode sectors in London and the South East. Estimates of annual sales have recently been put at £25m, which is on a par with a middle-ranking Tesco supermarket in a fairly modest location.
Suggestions that the Amazon / Whole Foods deal will leave the Big Four UK grocery retailers quaking in their boots are desperately wide of the mark. At present, both parties in the UK lack sufficient scale to de-stabilise the existing status quo and Tesco, Asda and Sainsbury’s have far greater experience of grocery multi-channel retailing than their US peers. Indeed, Amazon / Whole Foods probably have far more to learn from the Big Four than vice-versa. But that said, a joined-up Amazon / Wholefoods in the UK is a platform that will evolve considerably and will not lack cash for further investment. And, lest we forget, Morrisons is also part of the alliance. The other Big Four operators are hardly running scared, but at the same time they will be watching closely and will not be complacent.
The key takewaway? Amazon’s purchase of Whole Foods is implicitly also an admission of the difficulties of trading groceries purely online.