Amazon to Buy Whole Foods
About two weeks back, on June 16, 2017, e-commerce giant, Amazon, announced plans to acquire Whole Foods Market for $13.7 billion or $42 per share—which was about a 36% premium to Whole Foods’ $33 per share closing price the day before.
Amazon, as most of you probably know, is the 8,000-pound gorilla in e-commerce, with a market cap of about $462 billion and annual sales of about $136 billion. And the company’s been on fire over the past three years with sales up 80%, earnings up almost 800%, and shares up threefold from $300 per share in mid-2013 to just shy of a $1,000 per share, recently.
The acquisition announcement caught everyone by surprise and sent shock waves through America’s retail grocery business. The next morning, several other major retailers saw their shares open sharply lower on fears that Amazon’s entry into brick-and-mortar grocery was bad news for existing players.
What’s the Big Deal? Walmart Is So Much Bigger!
Now, you might wonder—what’s the big deal? Walmart has annual sales of $490 billion, that’s four times Amazon’s annual sales. So, what’s all the fuss about??
Many things, but let’s just start with growth. While Walmart’s annual sales grew by 2% over the past three years—from $476 billion to $486 billion—Amazon’s sales jumped 80% over the same three years. And that’s because Amazon aggressively expanded its product and service offerings and Amazon customers have been eating it up, so to speak.
Today, Amazon collects 43 cents on every dollar spent online in the U.S. and has 80 million Amazon Prime members. In other words, two out of every three U.S. households pays $99 each year for membership into “Club Amazon”, as I call it, and that’s not counting the $1000, on average, that each Prime household spends on Amazon every year.
Moreover, Amazon is an intrinsic, deeply embedded part of its Prime households: Members watch shows and movies on Prime Video; listen to Prime Music; wake up, check the weather, dim the lights, order stuff, and more by talking directly to Alexa on Amazon Echo devices in their homes; and are really glued to the overall Amazon experience, which goes well beyond shopping.
And the shopping experience with Amazon keeps getting better with a lot more variety to choose from—research tools and customer reviews, free two-day shipping and hassle-free returns, all at prices that are significantly lower than your neighborhood retail store. So, Amazon truly is an integral part of 64% of U.S. households. It’s huge and is only getting bigger by the day.
Why Grocery, And Why Foray into Brick-and-Mortar?
Why did Amazon decide to enter the world of brick-and-mortar grocery which is quite the antithesis of online retail? Grocery is an $800 billion-dollar business in the U.S. and Amazon wants a piece of that. Grocery is largely recession-proof and involves a lot of delivery logistics—which Amazon is a master at—and has supply-chain inefficiencies that Amazon believes it can streamline and profit from. So, reports say that Amazon finds the grocery business very compelling.
Moreover, a few years back, Amazon tried to sell groceries online but found out the hard way that customers like to pick out their fruits, vegetables, and meats in person, not so much online. So, by acquiring Whole Foods, Amazon plans to streamline the online and physical store shopping experience, introduce a lot of technology, bring down costs, drive up supply chain efficiencies, and revolutionize the grocery business, just as it did with books.
Whole Foods gives Amazon a physical presence near its customers’ homes, which nicely complements Amazon’s online businesses.
Why Pick Whole Foods Over Others?
And why pick Whole Foods over other grocery chains? Well, for one, swallowing the entire Whole Foods business isn’t as expensive as the others, in terms of market value. More importantly, however, Whole Foods has positioned itself extremely well with millennials, hipsters, and mobile-and-web-savvy customers with high disposable income, who regularly shop online, eagerly embrace new technology, and are already a part of Amazon’s ecosystem.
Today, Whole Foods has over 460 stores in the US, Canada, and the UK—all in prime, high-income neighborhoods. So, the acquisition also brings Amazon physically closer to its customers who can buy online, take delivery or return items at a neighborhood Whole Foods, and spend more with Amazon.
Even though Whole Foods has brand cache, it’s often parodied as “Whole Paycheck” because of its high prices. Amazon plans to change that by lowering prices through the use of cutting-edge retail and logistics technology at Whole Foods such as with Amazon Go which uses software and sensors allowing shoppers to walk into a store day or night, shop around, and walk-out without needing a cashier. Customers are billed automatically as they pick items off the shelves, which also enables Amazon to store their shopping history to offer them promotions the next time they come in. All pretty cool and well suited to millennials.
What’s clear is that no grocery chain has Amazon’s customer loyalty or tech smarts. So, when Amazon dropped the Whole Foods acquisition bombshell, it clearly put other major retail companies on notice that Amazon could now upend and radically alter the old-world grocery business model.
The Big Question: Will Amazon Succeed in the Fiercely Competitive, Low-Margin Grocery Business?
I think only time will tell. Walmart, in particular, sees Amazon as a huge threat and has been beefing up its online presence through acquisitions such as Jet.com. Walmart has 4,500 stores across the country—that’s 10 times the number of Whole Foods stores—so Walmart has physical proximity to more Americans than Whole Foods and could give Amazon a run for its money.
That said, Amazon recently introduced discounted Prime where lower-income Americans on government assistance programs can join Prime for $5.99 per month and enjoy lower prices, free shipping, Prime Video, Prime Music, and more. In doing so, Amazon is clearly targeting Walmart’s lower-income customer base striking at Walmart’s fear that lower-income Prime members will quickly get sucked into Amazon’s ecosystem and give Amazon a bigger share of America’s retail spending.
A note of caution here to be fair and balanced: While competition in the retail sector will lower prices and benefit consumers, Amazon’s influence over two-thirds of America’s retail spending poses a monopolistic threat. Therefore, the government may be looking to use the checks and balances built into the system to keep things fair and to make sure our shopping choices are not jeopardized by a behemoth like Amazon.
One Thing Is Certain.
The world is changing and it is changing at light speed. The promise of the internet which caught the public’s imagination in 1999 is now a reality. And it seems it is hitting an inflection point where the rate at which things are changing is accelerating.
So, you better get used to it and as an investor, don’t ignore what is taking place in plain sight. Do your homework. Don’t speculate. Make sure to diversify, but also consider looking into what is happening in this brave new world.
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