UK supermarkets lead FTSE fallers after Amazon reveals Whole Foods takeover

Courtney Goldsmith
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UK grocers are feeling the heat after Amazon scooped up Whole Foods (Source: Getty)

Today's shock announcement - Amazon's $13.7bn takeover of Whole Foods - has rocked the markets on both sides of the pond.

UK grocery stocks felt the bite as Amazon's new purchase promises to revolutionise the sector.

"Supermarkets and retailers are in retreat in both New York and London, as investors start to size up the possibility of Amazon doing to them what it has done to booksellers," said Chris Beauchamp, chief market analyst at IG.

"If we thought the supermarkets in the UK had trouble with the emergence of the German discounters, it is as nothing compared to the ramifications of Amazon’s expansion into grocery," Beauchamp said.

Tesco and Sainsbury's led the FTSE 100 fallers as shares closed down 4.92 and 3.85 per cent, respectively, on fears of shrinking margins. Shares in Marks & Spencer closed 1.88 per cent lower.

"Tesco shares managed a spectacular 180-degree change in fortunes on Friday. Investors flipped from satisfaction at the highest sales growth in seven years to fears that Amazon could knock Tesco off its perch as Britain’s number one supermarket," said Jasper Lawler, senior market analyst at London Capital Group.

Not bad news for everyone

Shares in Morrisons and Ocado both recovered after an initial drop as they emerged as Amazon's next potential takeover targets.

Lawler said: "There have been rumours for a while that Amazon would buy Britain’s online grocer Ocado as a test run before taking on the US. The drop in Ocado shares on the threat of greater competition from Amazon could eventually present an opportunity. Given the Amazon’s spending power and already large footprint in the UK, the Whole Foods purchase probably increases the odds of an Ocado acquisition.

"Amazon had already shown its intent through its partnership with Morrisons. Its existing relationship with Amazon helped Morrisons shares outperform those of Tesco and Sainsbury’s. Morrisons must have moved up the table of possible takeover targets now that Amazon has officially entered the supermarket sector."

Retailers face a costly transformation

"Amazon’s deal shows that bricks and mortar retailing isn’t dead; it’s instead about to go through a fascinating metamorphosis," Beauchamp said.

However, that metamorphosis will be a costly one.

"The cost of upgrading technology, revamping stores and improving supply-chain efficiency to compete with Amazon will be devastating to the profitability of incumbent supermarkets," said Lawler.

Moody's lead US retail analyst, Charlie O'Shea, said the takeover is a transformative transaction for the entire retail sector.

“Implications ripple far beyond the food segment, where dominant players like Walmart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks, but also the potential for multi-channel, which Amazon up until now has largely eschewed,” said O’Shea.

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