The Age of Amazon (AMZN)
June 27, 2017, 9:55 am
Unless you have been living under a rock, you know that Amazon (AMZN) bought out Whole Foods Market (WFM) for a whopping $13.7 billion. While many on the Street cheered the news, retailers gave no applause. It’s understandable that brick-and-mortar stores are worried, but I don’t think this acquisition will have a huge impact on them just yet.
In the near term, I believe the competitive threat is a little overstated. WFM has already responded to lost market share with a price reduction in produce, and while AMZN may deliver further cuts, WFM needs very high gross margins to remain profitable considering its high cost structure. At this point, Amazon has reached a certain level of maturity where its shareholders want profitable growth, and I do not think losing money in the food industry would be welcomed. The acquisition should be accretive to AMZN’s forward EPS, and I look for just marginal moves to improve profitability at first.
The longer-term outlook is different as AMZN has the potential to change food retailing to its prototype store, which would eliminate checkout lines. I believe this is the major motivation behind AMZN’s decision to buy WFM, as it gains real estate to test its technology and potentially set the stage for further brick and mortar expansion. While I believe all retailers will eventually adopt this type of technology, AMZN’s first-mover advantage and deep pockets to remodel could give it a definitive edge. However, this transition may be at least three years away, so any immediate impact on smaller companies like Kroger (KR) would be minimal.
There has been talk that WFM may receive a higher buyout offer, perhaps from Wal-Mart (WMT) or even KR. I do not see this happening as industry leaders do not view AMZN as a short-term threat given the already-intense competition. AMZN built itself into a giant by offering home delivery, but operating a brick-and-mortar store where competition is high enough is something different.
By paying a very high valuation of 20X forward EPS estimates for WFM, I think AMZN has discouraged other offers. While WMT is the largest grocer in the United States, I don’t think its management feels they should pay up for a relatively small competitor just to keep AMZN out of the business, especially since the company could easily find its way back in.