Amazon’s acquisition of Whole Foods Market, the e-commerce giant is positioning itself to battle Wal-Mart

The U.S. groceries market just got hotter.

Last year, when Wal-Mart Stores Inc acquired its peer Jet.com for $3 billion it created the world’s biggest brick-and-mortar retailer, eclipsing arch rival Amazon.

Last Friday, Amazon.com Inc countered the move with its own acquisition of Whole Foods Market Inc, a grocery chain, for $14 billion.

The two deals blur the traditional dividing lines between brick-and-mortar retail sales and e-commerce.

Further, Amazon’s acquisition of Whole Foods has also brought a disruption to the $700 billion U.S. grocery market, an area that is seeing a ferocious price war.

Already Wal-Mart is facing German-based grocery stores Aldi and Lidl, who are vowing to undercut each other’s prices, which makes the stakes for Wal-Mart even higher.

Amazon’s move is aimed at the heart of Wal-Mart’s groceries operations. Once the deal is completed, Whole Foods’ 460+ stores will become a test bed with which Amazon will learn how to compete with Wal-Mart’s 4,700 stores which offer groceries within 10 miles (16 km) to 90% of the U.S. residents.

While Amazon is expected to significantly reduce Whole Foods’ high prices in order to increase its footprint in the groceries market, Wal-Mart, which already has a significant presence in the groceries, is going after Amazon’s higher-income shoppers with its series of acquisitions of online brands, including Bonobos, Modcloth and Moosejaw.

As for the fierce price war in the groceries section, Wal-Mart has geared up for it: in recent months it has cut prices, modernized shelving, improved its fresh food and meat offerings and expanded its online grocery pickup service.

As per Marc Lore, who co-founded Jet.com and now runs Wal-Mart’s e-commerce business, Amazon’s move does not change Wal-Mart’s game plan.

“We’re playing offense,” said Lore.

Already Wal-Mart offers curbside pickup of its online grocery purchases at 700 locations across the U.S., with a plan of adding 300 more by the end of this year. Furthermore, it also is testing same-day fresh and frozen home delivery from 10 stores.

“We see an opportunity to do a lot more of that,” said Lore.

As per Roger Davidson, who earlier oversaw Wal-Mart’s global food procurement and is now the president of the Oakton Advisory Group, the deal is likely to reduce Wal-Mart’s brick-and-mortar advantage.

“I think this acquisition is a concern,” said Davidson.

However, industry observers say Amazon will find it difficult to effectively use this acquisition to pull Wal-Mart’s shoppers since both stores appeal to different customers.

As per Michelle Grant, head of retailing at Euromonitor, a market research firm, Amazon could potentially use Whole Foods 365, a part of Whole Foods’ portfolio, to lure Wal-Mart shoppers.

Whole Foods 365 offers private-label produces at much lower prices than those offered by regular Whole Foods stores. The brand is targeted at younger, value-conscious shoppers.

Amazon could tap into that and provide the needed financial muscles and build up its tactical ability into something big.

“That (Whole Foods 365) may become a big problem for Wal-Mart,” said Grant.

With a reported $12.5 billion in cash and equivalents, and a free cash flow of $10.2 billion as of March 31 2016, Amazon has money to spend.

In comparison, Wal-Mart had reported $6.9 billion in cash and equivalents and $20.9 billion in free cash flow as of January 31 2017.

“Amazon will reduce prices and change the assortment of products carried in Whole Foods stores to attract a larger customer base.  Kroger and Wal-Mart will be impacted as their customers will defect to Amazon,” said Brittain Ladd, a former senior manager at Amazon who used to work on its brick-and-mortar strategy.

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