Equity Markets: The Arrival Of Amazon In The Food Retail Sector
The sector is facing yet another challenge!
Amazon announced the purchase of the Whole Foods chain of stores in the United States on 16 June. The entire food retail sector was hit by the news, amid investor fears of heightened competition in the sector, led by the US. In Europe, equities exposed to the US market also came under pressure, particularly Ahold-Delhaize which generates over half of its' sales in the US. Stocks such as Casino, with lower sensitivity to US sales and/or with greater exposure to emerging markets, proved much more resilient.
At current price levels, the food retail sector appears to have been heavily penalised and market sentiment is currently highly negative. The sector is therefore likely to rally in the short term. Furthermore, mergers in the sector are possible, as the existing companies faced with the Amazon threat are eager to form defensive ties or diversify.
However, the arrival of the on-line sales leader in the food market is a cause for concern in terms of the structural impact on the sector. Amazon is provoking fears of the digital wave crashing down onto the food retail industry, which has been recovering over recent quarters from a challenging environment, caused by deflationary fears and heightened competition. The recent economic recovery was good news however, with resurgent inflation having a generally positive impact on the sector. Although Amazon’s announcement has rekindled fears of steeper competition in the sector and heavier price pressure, these risks should nonetheless be viewed from a broader perspective for the time being. Whole Foods is unlikely to represent a major risk in terms of pricing pressure, as it is a high-margin quality chain offering services.
Above all, the arrival of Amazon raises the question over the business model that will have to be adopted, with companies necessarily having to include on-line sales and responding to consumer demands from the Y generation.
The entry of new players into the sector is a potentially disruptive phenomenon. Many other business sectors have already faced this issue, such as the commercial sector at the moment. Major US retailers are heavily underperforming the market, hit by the challenge from internet companies and changes in consumer behaviour. In Europe, the digital transition initiated by H&M and Inditex have met with highly varying degrees of success. Even the luxury goods segment is not immune from this phenomenon. Although it would appear to be sheltered from price pressure thanks to the reputation of its products, the segment is nonetheless facing fresh competition and has had to actively participate in the on-line trend.
In short, digitalisation is a major structural trend affecting many sectors. Given the inexorable rise of digitalisation, investors are obliged to analyse in detail companies’ capacity to adapt to this trend. Any lag behind the trend will weigh on equity performances. All is not lost for existing companies however, as long as they adopt a segmented approach to their client base. Against this backdrop, stock picking shall remain a determining factor.