WHAT’S NEXT FOR AMAZON, WHOLE FOODS AFTER DEAL
Reports also raising possibility of bidding war to acquire chain.
When Amazon.com completes its acquisition of Whole Foods Market, Amazon CEO Jeff Bezos will try to keep the grocer’s reputation for premium fresh foods while cutting prices to shed its “Whole Paycheck” image, Bloomberg News reported Monday, citing an unnamed source.
Meanwhile, other reports raised the possibility that rival bidders could step in to create a bidding war for the Austin-based chain.
Amazon expects to reduce headcount and change inventory to lower prices and make Whole Foods competitive with Walmart and other big-box retailers, Bloomberg reported, citing a person with knowledge of the company’s grocery plans. That includes potentially using technology to eliminate cashiers.
An Amazon spokesman denied any job cuts were planned.
Amazon, known for its competitive prices, is trying to attract more low- and middle-income shoppers with its grocery push. The Seattle-based company already offers discounted Amazon Prime memberships for people receiving government assistance and is part of a pilot program to deliver groceries to food-stamp recipients.
Whole Foods has already been reducing prices to try to turn around its worst sales slump since going public in 1992. It has four “365 by Whole Foods Market” stores that are cheaper to build and operate than a traditional location and offer lower-priced items aimed at younger shoppers.
Amazon is considering extending the cost-cutting effort with the no-checkout technology it’s developing at its Seattle convenience store, “AmazonGo,” according to the person familiar with the matter, who asked not to be named because the plans are private. The technology lets people pay with
smartphones without seeing a cashier or going to a checkout kiosk, which would help Amazon differentiate itself in the brick-and-mortar setting and reduce labor costs at Whole Foods stores. The employees remaining would help improve the shopping experience, the person said.
Drew Herdener, an Amazon spokesman, said in a written statement that the company has “no plans to use no-checkout technology to automate the jobs of cashiers at Whole Foods and no job reductions are planned.”
Amazon would also look to change Whole Foods’ inventory, introducing its own private-label products to replace items deemed too expensive to have mass appeal, the person ‘Amazon will ultimately be able to outbid any other party by a meaningful amount.’ Daniel Kurnos Benchmark Research analyst with knowledge of the matter said. That fits with Whole Foods private-label push to compete on price, and gives Amazon a bigger foundation on which to develop its own food brands.
Such changes may be a long way off, and Amazon has plenty of time to change its strategy, with the $13.7 billion deal not expected to close until the second half of the year.
Meanwhile, Whole Foods shares made big gains on Friday and Monday, rising above the proposed $42 per share deal price and potentially indicating investors expect another bidder could emerge, analysts said.
Barclays analyst Karen Short raised her Whole Foods price target to $48 from $38 and upgraded the stock to overweight from equal-weight, citing the possibility of counterbids.
“Many will do anything to either make this acquisition more costly for Amazon, or prevent the asset from landing in Amazon’s lap,” Short wrote in a note to clients.
A $48-a-share price tag would be more than reasonable for a fellow retailer that could eliminate overhead at Whole Foods, Short said, while adding that very few companies could outbid Amazon.
Benchmark Research analyst Daniel Kurnos also expects a bidding war, but he said: “Amazon will ultimately be able to outbid any other party by a meaningful amount, given the valuation gap between them and WFM.”
Wedbush analyst Michael Pachter said the deal was a “healthy option to accelerate growth” at Amazon as it could use Whole Foods supermarkets as distribution centers for its online grocery service and to sell its own branded devices, such as Kindle e-readers.
Pachter said Amazon was likely to increase spending to build its online grocery business over the next several years, so the acquisition would add only slightly to earnings while boosting revenue significantly.