Last week, a blockbuster deal was announced by Amazon.com, Inc. (NASDAQ:AMZN). In a deal valued at US$13.7 billion, the internet retailing giant will purchase Whole Foods Market, Inc. (NASDAQ:WFM), thereby expanding into brick-and-mortar retail.
This deal will significantly change the landscape for the high-end grocery chains, so a question needs to be asked: “How will this impact the competition?”
A number of competitors in the food retail sector declined in value quite significantly. The shares of Canadian grocery store Empire Company Limited (TSX:EMP.A) closed on Friday after losing over 3.5% of the previous day’s value.
Although the company operates primarily in western Canada, the grocer is a national chain. Clearly, investors have noticed that the rally, which took place over the past six months, has run out of steam. Given Amazon’s expansion into the grocery space, the worry may be that margins will be squeezed even further.
Currently trading at a price under $19 per share, Empire now offers a dividend yield close to 2.2% for investors willing to buy and remain patient.
Although Amazon’s foray into brick-and-mortar retail is worrisome for many, investors need not lose sleep over this event.
Over the past five to 10 years, investors have become keenly aware of the destruction of shareholder value in the retail space. It is clearly better to purchase certain items online. Books were the first thing that came to my mind, followed by other “standard” products, like toasters or exercise equipment.
One reason many grocery chains have been able to continue increasing revenues and have not been affected by the rise of e-commerce is due to unique selection process that takes place. When going into a grocery store, each client has the opportunity to squeeze the apples, or feel how ripe a melon is. We select our fruit by finding the individual unit we want and then proceed to the checkout. This process will not go away anytime soon.
Although we have the option to buy certain things like toilet paper or other standard household items online, the reality remains that most people will not be splitting their grocery shopping between online and brick-and-mortar stores.
It makes perfect sense for busy Canadians to want to use the online shopping experience, but the reality is that online grocery shopping will probably not go on for very long. After receiving a few bad apples or a rotten tomato, customers will probably return to physical stores to purchase the majority of their grocery store goods.
While shares of Empire Company Limited have had a number of bad years, investors need not worry about the long-term prospects of the company, as long as the fruit is fresh and the ice cream remains frozen.
