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Tough Time Ahead for Grocery Stocks and ETFs?

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Online retailing has wreaked havoc on brick-and mortar retailing or department stores like Macy’s (M - Free Report) , Kohl’s KSSJ.C. Penney JCP, Nordstrom (JWN - Free Report) and many others. Many retailers lately went bankrupt and department stores have slashed 40% of their headcounts since 2001 (read: Is a Wave of Store Closures Troubling Retail ETFs?)

Now, it seems that the same fame is awaiting the grocery space. This is because e-commerce biggie Amazon (AMZN - Free Report) has announced a hot all-cash $13.7 billion deal to acquire the natural and organic foods supermarket chain Whole Foods Market Inc.WFM on June 16.

Though it is still unclear how the joint model will work, it may be something similar to the store, called Amazon Go, which is different from a typical Walmart (WMT - Free Report) or supermarket. Rather, it requires consumers to use an app called Amazon Go, to automatically include the products needed to be added to a digital shopping cart; and then simply exit without waiting long to  check out, as per the source. The stores will have ready-made food, staples as well as grocery products.       

Will Grocery Stores Die an Early Death?

Once the acquisition closes, Amazon plans to lower prices at the premium grocer by automation, headcount reductions and inventory changes, as per the source. Since the possibility of lower grocery prices is high with this Amazon-Whole Foods deal, other grocery stores and supermarkets may experience pricing pressure and lose out in the competition (read: Online Shopping Gaining Traction: ETFs to Buy).

Investors have now started to apprehend that the gradual of death of brick-and mortar retailers thanks to the rise of online retailing, will be replayed on the supermarket scenario (read: 5 ETFs & Stocks: Silver Lining in Soft May Retail Sales).    

The emergence of digitalization is widespread in the restaurant space too. Panera Bread Company recently indicated that its digital sales have risen over $1 billion on an annualized basis and “are on track to be twice as high in two years.” Chipotle's  first-quarter digital orders made up about 8% of the $1.07 billion in sales and that 8% marked a 53% year-over-year rise. And now, Amazon’s move with Whole Foods Market is likely to make the matter worse for grocery stores.

As per an article published on CNN Money, “only about 2% of about $600 billion in annual grocery sales are made online.” About 20% of the grocery business is anticipated to be online in the next couple of years, as per the source. But with Amazon’s nature of fast moving, regular grocers may fall short.

That said, we can conclude that grocery stores may not be doomed as fast as apparel and electronic product retailers. Like several analysts, we too believe that shoppers have a tendency to touch or have a look at fresh food or vegetables at the time of buying. So, out-and-out online shopping may not see success in case of grocery stores.

Stock and ETF Impact

Big grocery and supermarket chains had a bloodbath on the day the Amazon-Whole Foods deal was made public. Kroger KR(KR),Supervalu SVU, Costco (COST - Free Report) , Sprouts Farmers Market Inc. (SFM - Free Report) ,United Natural Foods Inc. (UNFI - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) losing approximately 9.2%, 14.4%, 7.2%, 6.3%, 11% and 4.7% on the day. Discount retailer Target Corporation (TGT - Free Report) also declined over 5% on the day, as per the source.

This can hurt ETFs like First Trust Nasdaq Retail ETF (FTXD - Free Report) , PowerShares Dynamic Retail Portfolio ETF (PMR - Free Report) ,VanEck Vectors Retail ETF (RTH) and Consumer Staples Select Sector SPDR Fund (XLP - Free Report) .

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