Amazon and the Threats of New Entrants and Substitutes

Amazon is extending its presence in the grocery market by buying US grocery retailer Whole Foods Market. Although it only has a handful of branches in the UK, Whole Foods is a major player in the US, and represents Amazon's biggest ever takeover at $13.7bn. Founded in 1978 in Texas, it was a pioneer of the move towards natural and organic foods. It has grown to more than 460 stores in the US, Canada and the UK, and employs about 87,000 people. However, although Jeff Bezos (founder and CEO of Amazon) says that "they're doing an amazing job and we want to help them continue", they are currently suffering falling sales and dissatisfaction from investors which has enabled Amazon to step in.

This intensifies the rivalry in the supermarket industry, and has immediately resulted in the share values of other supermarkets losing value. From the BBC websiteFrom the BBC website, Tesco shares sank by 5% and Sainsbury's by 4%. Marks and Spencer, who have only recently announced their first move into online food delivery, fell 2%. On the other hand, Morrisons which has a tie-up with Amazon, have benefited from the announcement and closed on Friday 1% higher - while Whole Foods rose by 29%, and Amazon by 2.4%. 

What will Amazon do with Whole Foods Market? Clearly the stock market sees the deal as an enhancement to the Amazon model as well as to Whole Foods. The obvious benefit is Amazon using its delivery network to bring Whole Foods products to a much wider audience, and to cross-sell with any of the other ranges that Amazon supplies. Lower prices for consumers also seems an obvious outcome, using Amazon's massive economies of scale, and triggering yet more of a price war in the groceries market. 

There is no hint yet of Amazon over-reaching itself and entering the upward curve of diseconomies of scale - how long and how widely can it keep growing?