x
Breaking News
0

What Does Amazon Want From Whole Foods?

By Investing.com Stock MarketsJun 19, 2017 11:25AM ET
www.investing.com/analysis/amazon-buys-whole-foods;takes-bite-out-of-brick-and-mortar-groceries-200195900
What Does Amazon Want From Whole Foods?
By Investing.com   |  Jun 19, 2017 11:25AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

by Clement Thibault

This past Friday, June 16th, Amazon (NASDAQ:AMZN) announced it had agreed to buy Whole Foods Market (NASDAQ:WFM) in a in $13 billion deal.

Whole Foods Daily
Whole Foods Daily

Following the news, Whole Foods' share price jumped 29% to $42.

Amazon Daily
Amazon Daily

At the same time, Amazon's stock jumped 2.4% to $987.

KR:COST:TGR:WMT Hourly
KR:COST:TGR:WMT Hourly

Other major retailers in the grocery space were sold off on the news. Many were treated rather harshly during Friday's trading: Kroger (NYSE:KR) plunged over 9%, Costco (NASDAQ:COST) dropped over 7%, Target slipped over 5%, and Walmart (NYSE:WMT) slid down 4.6%.

So what does the Whole Foods deal mean for Amazon and what might the ramifications be for the industry in general.

Surprised by the move? You shouldn't be

US Groceries Store Sales over the past 12 months have amounted to $630 billion dollars, of which Walmart is estimated to control about 40%, or $260 billion. It's a big industry and one largely unchanged for the past decade. It's therefore no surprise that Amazon sees an opportunity for disruption within this retail subsector.

Amazon has been eyeing the groceries arena for a while now. It's put effort into developing check out automation technology and has experimented with grocery deliveries. Evidence of this can be found in two Youtube videos published by Amazon; AmazonGo shows off the e-tailer's check out technology, and AmazonFresh Pickup, visually describes how groceries can be delivered to your trunk.

Whole Foods not an industry leader

After the acquisition news was made public, an Amazon spokesperson claimed there are no plans to implement automated systems at any of the newly acquired Whole Foods locations. We find that hard to believe.

To begin with, Amazon hasn't purchased an industry leader with a healthy, growing business. In the past 5 quarters, top line growth for Whole Foods hasn't gone beyond 2%. Its Operating Margins have been on the decline since 2013—shrinking by 35% since then—from 6.84% to 4.45%. Net margins haven’t fared any better, falling from 4.64% to 2.65% over the same time period.

Whole Foods has about 464 stores (442 in the US. 13 in Canada and 9 in the UK), compared to Walmart's 4700 in the US and over 11K stores worldwide. Whole Foods is more of a niche player in the grocery industry, catering to limited demographics looking for high-end, artisanal, organic and natural foods—mainly upper-middle class health conscious families and a fair amount of millennials.

Walmart, with its lower prices and generally mainstream inventory, is at the lower end of the spectrum, appealing to lower income, budget conscious families. The competition between Walmart and Whole Foods is not direct. Amazon would have to make dramatic changes in Whole Foods pricing in order to compete with Walmart. For now though, Amazon is keeping the management and branding in place.

What does Amazon want from Whole Foods?

That is indeed the 13 billion dollar question. Obviously, Amazon wants a piece of the $630 billion grocery pie. And Whole Foods provides a medium-sized entry point. The stores are in place, the supply chain is established, the business is profitable, and management knowledge regarding how to run a physical retail location is key for Amazon. Establishing a similar network without the physical retail expertise would have been a nightmare for the e-commerce giant.

Of particular note, this could also be Amazon admitting that grocery shopping exclusively online is probably not the future, and that for all its retail expertise, it still has to dip its toes into the murky brick-and-mortar waters if it wishes to capture a meaningful market share of this significant niche.

Conclusion

The way we see it, the Whole Foods acquisition is a large-scale, perhaps somewhat expensive experiment for Amazon. They have plans for the future of grocery shopping, and they believe they can disrupt the industry by implementing technology in brick-and-mortar stores. Whole Foods' 460 stores at a cost of $13 billion was the correct scale at the right price. It allows Amazon to test the grocery market waters.

Based on our above conclusion, the immediate impact on other retailers will be minimal. The deal is expected to close during the second half of the year, after which nothing is expected to change, at least not immediately. We believe losses suffered by retailers' shares on Friday were an absolute overreaction to an experimental purchase in a very competitive and crowded industry.

Amazon's acquisition reminds us of Alphabet's (NASDAQ:GOOGL) "Other Bets" segment more than anything else. There's a large potential payoff in disrupting an industry, but there's also still a very long way to go to get there.

What Does Amazon Want From Whole Foods?
 

Related Articles

What Does Amazon Want From Whole Foods?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

 
Are you sure you want to delete this chart?
 
Write your thoughts here
 
Replace the attached chart with a new chart ?
Post
Post also to:
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments
Martin Zhekov
Martin Zhekov Jun 19, 2017 5:02PM GMT
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Time to buy Costco shares :)
Reply
0 0
 
Are you sure you want to delete this chart?
 
 
Replace the attached chart with a new chart ?
Post 1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
 
 
 
Add Chart to Comment
Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email