In the history of any industry, along with its associated supporting supply chains, there comes a seminal series of events that ultimately point to a major inflection point, one that clearly indicates that business-as-usual is no longer an option. For the food and grocery industry, and all of its supply chain stakeholders, the year 2017, in the second week of June, two thunderbolt events ignited a seminal industry change.
As we pen this Supply Chain Matters posting, business and general media are broadcasting the headline announcement that Amazon intends to acquire Whole Foods Market for $42 per share, or more than $13 billion, a clear and obvious effort to directly penetrate the retail grocery landscape. This is Amazon’s largest acquisition to-date, and no doubt, there were likely multiple choices. In the press release announcing the acquisition, Amazon CEO Jeff Bezos indicated that the attraction to Whole Foods was the wide offering of natural organic foods.
By our lens, healthy margins, a loyal brand, and future methods to leverage online and in-store shopping were an obvious consideration, Whole Foods has also been under intense pressure from private-equity firm Jana Partners. Whole Foods CEO John Mackey has been quoted as characterizing Jana as greedy. (Actually, he utilized a more direct term)
According to the release, Whole Foods will continue to operate under its current branding, and CEO Jim Mackey will stay-on as CEO.
News and social media reports further indicate that if the grocer receives a better acquisition offer, Whole Foods would be obligated to pay a $400 million termination fee to Amazon.
The other industry shockwave this week came from Kroger Company, one of the largest retail supermarket chains in the U.S., who issued unexpected lowered earnings forecast for the year. The aftermath of this news caused the chain’s stock to drop by 19 percent, the steepest one-day drop for the company’s stock in more than 17 years.
Kroger CEO Rodney McMullen is noted as sting the following in an interview:
“The change right now in what the customer wants has never been faster.”
Business and general media reports are citing Nielsen and other retail sales data all indicating that consumers are both more price conscious in their food shopping, continue to seek out healthier food and beverage choices, and are increasingly turning to online channels for food and grocery needs. Nielsen data indicates that online grocery orders have risen 6.8 percent while visits to deep-discount chains are up 2.9 percent.
Other grocery retail chains are also feeling the effects of quickly changing grocery shopping trends and the words, industry consolidation, are now coming to the forefront.
At the same time, discount grocery chains Aldi and Lidl are making a major expansion within the U.S. to take advantage of the current shopping trends, which will add to increased industry competition at the retail level.
What is now occurring in the retail channel will continue to cascade across consumer product goods, food and beverage supply chains in the form of tougher price negotiations and demands for increased product innovation addressing healthier food choices. The industry has already experienced the pressures from both Amazon and Wal-Mart as to which will receive the most attractive supply pricing deals.
As noted in our Supply Chain Matters industry commentary published in May, the industry winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.
CPG suppliers are also subject to the influences of private equity, specifically 3G Capital, and no doubt, there will likely continue to be influences for additional M&A among major suppliers and food producers.
Consumer packed foods and associated industry supply chain teams need to pay very close attention to industry developments and associated implications. The notions of single-channel product demand forecasting or other business-as-usual supply chain planning and distribution methods no longer apply during now permanent industry shift. Agility, resilience, and a predictive understanding of consumer needs in food and food buying preferences are table stakes.
Be it noted that in June 2017, two industry shockwave developments became the catalyst for structural packaged and fresh food industry change.
Supply Chain Matters will continue to monitor industry supply chain developments and share insights. We predicted significant industry changes at the start of the year, and the clock speed has accelerated.
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