How Amazon's Deal with Whole Foods Could Impact Retailers

Chelsea West
June 25, 2017

Shares in United States supermarket chains Kroger and Costco have plummeted since the deal was announced last week, while Amazon's have already enjoyed a 3% bump - adding roughly $13 billion to its market capitalisation, just short of the figure it will pay for Whole Foods.

While Amazon got its start by launching an e-tail service which has been blamed for the closure of numerous high-street bookstores, the company quickly pivoted: what had started as an online bookshop soon branched out into selling absolutely everything the company could get its hands on, then via the Amazon Marketplace into everything anybody could get their hands on. The Post scaled back on local news coverage, which was only of interest to readers in the D.C. area, and instead focused on national news, especially politics, aiming for scoops that would generate interest across the country and go viral. Indeed, packaged-goods producers' businesses are already under stress, with manufactured-food volumes at large companies declining 4% this year, as consumers seek out less-processed fare. At the time of the announcement, Barclays gave an Amazon/Whole Foods deal a 60 percent chance of working out, with the remaining 40 percent hinging on other bids. Publix is expanding as well.

Online delivery of groceries so far has been tough for any company to pull off because of customers' concerns about the quality of meat and produce, Wedbush Securities analyst Michael Pachter said. Amazon is undoubtedly viewing the opportunity as a more lucrative one.

Amazon announced last week that it had reached an agreement to acquire Whole Foods for $13.7 billion. The Motley Fool owns shares of and recommends Amazon, Costco Wholesale, and Whole Foods Market. Whole Foods (wfm) itself may have been under duress, pressured by an activist investor and softening sales, but the healthy-food movement and the meticulously curated store experience that it pioneered is alive and well. It will likely cancel that contract and switch to Amazon's delivery network, forcing Instacart to look elsewhere, such as Publix, to make up for lost sales.

Another person familiar with the situation told Bloomberg that Whole Foods has had a quiet week in the wake of the Amazon bid, suggesting that a bidding war isn't imminent. I think we coulda talked for 10 hours. "Publix will want to be in the 2020s as soon as possible".

It now generates over $6 billion in online grocery sales; however, only $1 billion of that would be considered "food retail". It is too much for Amazon to ignore. "Fresh and prepared foods are the challenge", West said.

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Although this arrangement seems great and all, why should Walmart even spend $14 billion and more when they already have so many brick and mortar grocery stores? With a portfolio of new fashionable private labels like Happy Belly, Wickedly Prime, Presto! and Mama Bear, millennials are clearly on Amazon's mind. Kroger's stock lost 30 percent of its value in two days. They're only increasing market share. But according to JPMorgan, Walmart is the only retailer with a legitimate shot of entering the fray.

But it's not an easy path for Amazon by any means, GlobalData Retail says. Beginning with books and spreading to consumer electronics, Amazon has a reputation for disrupting existing markets. "[There's] the need for refrigeration and factors such as expiration dates, smell, and color...'" And, of course, price. I feel that the selloff of Costco stock was overreaction.

Clearly, stock prices could change up or down depending upon release of additional details about the merger agreement.

"No doubt it's a big deal; it's a large amount of money", Harinarayan said. "The smaller regional supermarket chains and independents will bear the most pain".

The incentive for Chinese tech firms to slash costs and take a bigger bite of the offline market is clear.

Livingston cautioned Publix against pursuing a more aggressive growth strategy. In other words, room for growth is very limited in the market.

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