Last Friday, in a move that few on Wall Street saw coming, Amazon (AMZN) stunned the street by announcing the acquisition of upscale grocer Whole Foods (WFM) in a deal valued at $13.7 billion. The hot take is that consumers might ultimately benefit, though it’s far less clear as to who the long-term winners and losers will be. But that didn’t stop the market from weighing in on the subject.
By the close of day, Amazon stock had risen 2.44%, and in the process added $15.3 billion in market cap – effectively paying for the acquisition, in the eyes of some analysts. However, things didn’t play out quite the same way for the rest of the grocers, as well as major food producers, which were down across the board. Looking at the end of day losses in the list below, you might get a pretty clear picture of who the market felt were most at risk coming out of this deal.
What’s particularly interesting about this reaction is that it’s not just the usual suspects that took a hit – Whole Foods’ direct competitors in the grocery space – but a wide range of companies, including discounters, pharmaceutical distributors, and even suppliers.
Competitors in the Crosshairs?
How might this deal affect their direct competitors such as Costco, Target, and Walmart and their ability to compete electronically? Each of these companies might now be expected to open their wallets and spend in order to compete. Could it affect their bottom line?
For CVS and Walgreens, it could be a different type of threat. By taking over Whole Foods’ 450 physical stores, most of which in affluent and highly desirable locations, some retail analysts see the move as an increase in Amazon's ability to put merchandise directly into consumers' hands. The small footprint and high margins associated with selling over the counter and prescription medications has some analysts suggesting these WFM locations might be updated to include a pharmacy counter.
Even producers like General Mills, Kraft Heinz, and Kellogg—names perhaps not expected to be affected by this news—took a hit. Could AMZN, with its large online presence and commitment to seeking efficiency up and down the supply chain, pressure producers on price?
All combined, Amazon’s rivals lost over $25 billion in market cap by the end of Friday.
But is This Really a Slam-dunk?
Despite the negative sentiment being poured over competitors, there’s no guarantee things will work out well for Amazon.
Many observers feel that the logical extension of this deal will be a big push into online ordering and home delivery of groceries and sundries – a business that has taken down its fair share of companies in the past. Anyone remember WebVan or HomeGrocer.com? This is a space in which it’s notoriously hard to turn a profit, due to low margins, logistical difficulties, and consumer pickiness. For example, do you want an avocado that’s ripe today or one that will be ripe in two days?
However, Amazon has shown that not only are they willing to sell low margin items, but they are willing to lose money–perhaps for a long time—in order to gain market share. And AMZN has in the past overcome complicated logistical challenges. As for the avocados, in a company that seems to have an algorithm to solve everything, it’s a good bet they’ll find a fix for this issue.
But the real upside in this deal, according to some analysts, has to do with data, the data that the company already has on consumers. Maybe they'll take that data, localize it around the newly acquired Whole Foods stores, and start filling those stores with more than food.
Amazon has been pushing into physical retail for a while now, first with their Amazon Books stores and then with Amazon Go—small convenience stores that feature checkout-free shopping. It’s likely they have learned a lot about consumer habits from these brick-and-mortar stores and used them as test cases before scaling up.
The question now is whether the acquisition represents a new paradigm in the supermarket and retail space.
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