Amazon shaking up grocery space
The deal no one can stop talking about
Amazon.com’s US$13.7 billion acquisition of Whole Foods, a transaction that closed Monday, is its largest. But on a broader perspective, the deal would not rank in the Top 100 of all time.
But, j udging f rom the slew of analyst reports, news items, implications for issuers in the food retail business, and overall general consumer interest ( groceries are a US$ 700 billion business in the U. S. alone), the transaction between a company with almost no physical retail presence and a company that is known for its bricks- and- mortar stores and a well- educated, urban group of buyers, is probably the most watched in recent memory.
“( It) has been one of the most discussed topics within our traditional retail coverage universe,” said a report from U. S.- based Raymond James that was issued Tuesday, when assessing the game- changer that shook the markets in the middle of June and has been reverberating since.
For instance, in a recent conversation about share price volatility with an insider at Loblaw Cos. Amazon/ Whole Foods was mentioned as among the list of reasons.
For t hose who have doubts about the all- embracing effects of the transaction, a stroll through the daily news produced by Bloomberg would be a good place to start, A recent article, for instance, analyzed the worsening credit spreads of publicly-listed food retailers which had borrowed in the public markets.
While holders of debt issued by existing retailers have already paid a price, Amazon was able to borrow US$ 16 billion, in seven tranches, to fund the transaction, at lower spreads than it had originally anticipated.
That mountain of analysis continued Tuesday when at least two U. S. brokerage firms, published reports on what the transaction means. Those reports, from Raymond James and SunTrust Robinson Humphrey, foll owed r eports f r om t he same two firms the previous day.
On that day, when Amazon showed its determina- tion by cutting prices at Whole Foods Market by as much as 43 per cent SunTrust reported that because groceries is one of the segments “l east penetrated online where we believe Amazon brings several unfair competitive advantages that should drive market share gains and better profitability.” In the near term, the analysts expect about 200- 300 basis points of “gross margin” pressure at Whole Foods.
Those t wo brokerage reports shared another research trait: both firms sent their analysts into the field to see the effects of Amazon’s purchase first-hand.
Just like mining and precious metals analysts need to see operations up close, so do those who cover consumer/specialty grocery stocks.
For instance, SunTrust did a grocery price check in the Atlanta market while Raymond James, which made two trips, focused on a Whole Foods store, in south Tampa.
And in ominous news for existing suppliers, SunTrust found that for the first time since it’s been making price studies, Whole Foods’ “grocery (or non-produce) basket was cheaper than Sprouts Farmers Market ( another publicly listed grocer.)”
For conventional produce, SunTrust found that while Whole Foods has made “some progress closing the price gap between ( Sprouts Farmers and Kroger Co.) but still has a long ways to go.”
Raymond James undert ook a similar study: it l ooked at the change in prices for 40 common grocery items at Whole Foods from Monday to Sunday.
Of the 40 items (all identified in the report) one quarter were non- organic while the other 30 were organic. On average, prices were down about 8 per cent with the biggest declines in produce.