Friday, June 16, 2017


Unless you've been asleep in a cave, you heard that Amazon (AMZN) bought Whole Foods Markets (WFM) in a deal valued at $42 a share to Whole Foods shareholders, and $13.7 billion to Amazon.  It sent waves of concern through the stock market today, as investors of retailers everywhere started looking under their skirts for a sign that something might be creeping up on them.

All of those names you see above had their stocks hammered or at the very least, bitten into over this deal.  So, what's going on?  Are we headed toward a one-retailer world, or is this just yet another over-reaction to a short-term stimulus?  Or both?

One strange thing that happened is that Amazon's stock went up after the deal was announced, to a degree that equated to almost getting the Whole Foods property for free.  That's odd, especially since the deal was funded from debt.  Somehow, Amazon shareholders didn't care about that.  So, we'll wait for that other shoe to drop.
The other strange thing is that the stock of Whole Foods traded above the $42 offer price for most of the day, and closed at nearly $43.  That tells me one thing:  Somebody influential is expecting another offer to come to the table.  Will that happen?

CNBC analyst Karen Finerman thought that perhaps Walmart could step-in and make a counter-offer for more than the Amazon offer.  There's a low chance of that happening, but apparently, traders thought that there was enough of a shot that it was worth an extra dollar of share price in exchange for the risk.  Let's see what Whole Foods' shareholders have to say about this deal.  A 9% stakeholder, Jana Partners, has been putting pressure on Whole Foods to sell or do something to increase its market share.  They were tired of the moniker Whole Paycheck, which was my impression the few times I shopped there more than 20 years ago.

Now, to the nuts and bolts.  For those of you who think that the Internet rules retail, consider that 92% of all sales is off-line (which includes gasoline - and let's see Amazon get into that) and only 20% of 25-to-34-year old's buy their groceries online.  Those are two big trends, and it's up to Amazon to buck them with this purchase, which one presumes they aim to do.
As far as grocery sales are concerned, Amazon does about $5 billion a year in that "Amazon Fresh" thing that they sell to Prime members.  Whole Foods does $16 billion - so perhaps there is future earnings here?

Are you willing to allow someone else to pick-out your fruit and vegetables and deliver them to your home?  Perhaps I'm old-school, but I enjoy shopping. I like the idea of picking out my own things and taking them home myself.  Is that what Amazon is banking on by buying Whole Foods?  OR ...
Are they planning to make another purchase - such as Lyft or Uber - to enhance the home delivery segment?  Already, Walmart is paying employees to take products to customers on their way home.  This is just one step behind the Uber concept.  Something tells me that Amazon isn't done.

And, what about other businesses?  Would you be willing to buy your prescriptions online and have Amazon deliver them?  Look out, CVS, Walgreen's, and Rite Aid.  Buying a car? Let us deliver it to you.  Carmax, look in your rear-view mirror.
The Universe of possible acquisitions is almost unlimited.

Meanwhile, Amazon has gone from "asset light" (online only) to "asset heavy" (brick and mortar) and one wonders what Jeff Bezos' long range idea is here.  Are they building a network of distribution centers?  It's no coincidence that most of Whole Foods' stores are close to Amazon distribution centers.
Grocery stores are traditionally low-margin businesses, and that's why the sector struggles.  Great companies like Kroger, Costco, Sprouts, and others (see above) are struggling financially while still giving great service and wonderful shopping experiences to consumers.  It's more than the great experience, and the problem is that it's difficult to do both.  That's where Target struggles, and why they will either have to rebuild themselves or give-up selling food altogether.
The latter will be a great concession, since it was a commitment that they made (albeit half-heartedly) to compete with the likes of Walmart.

So - what do we do here?  We watch Amazon for the next move forward and marvel at their preoccupation with world dominance.  If I was a WFM shareholder, I'd hang in, waiting for a counter-offer.  The possibility of some government interference is low, but there is still the possibility of another, higher offer.
What to buy? Well - groceries.  But stocks? My money is on Walmart.  I can't see them laying down and allowing Amazon to roll over them.  Besides, I'd suspect that there is almost no overlap between Whole Foods' customers and Walmart customers.  They are both entrenched in their habits.
And after all, there is room for more than one dominant retailer.

At least for now.