Ama­zon aims to up­end U.S. gro­cery in­dus­try

Sil­i­con Val­ley is look­ing be­yond tech for ac­qui­si­tion tar­gets, set­ting the stage for a ma­jor role re­ver­sal.

Los Angeles Times - - FRONT PAGE - By Paresh Dave

For once, the tar­get of an ex­trav­a­gant tech in­dus­try ac­qui­si­tion wasn’t a small start-up un­fa­mil­iar out­side of Sil­i­con Val­ley, but a house­hold name.

Few fore­saw Ama­ reach­ing an agree­ment Fri­day to buy gro­cery store Whole Foods for $13.7 bil­lion. But the pend­ing deal — a record pur­chase for Ama­zon — has opened the pos­si­bil­ity of the na­tion’s big­gest tech com­pa­nies ac­quir­ing busi­nesses known for bricks-and-mor­tar stores rather than soft­ware.

As strug­gling re­tail­ers, banks and au­tomak­ers weigh buy­ing tech­nol­ogy to catch up to the smart­phone age, the likes of Ama­zon, Google and Face­book may find it sim­pler to res­cue the hob­bled.

“Ama­zon is ef­fec­tively say­ing that if re­tail­ers are go­ing to tool them­selves up with tech­nol­ogy, then it will tool it­self up with a phys­i­cal pres­ence and high-street brand,” said Paul Cu­a­tre­casas, chief ex­ec­u­tive of the Bri­tish in­vest­ment bank Aquaa Part­ners. “It helps jus­tify the be­lief that the larger tech gi­ants will start buy­ing up es­tab­lished com­pa­nies, like banks and au­to­mo­tive man­u­fac­tur­ers. The im­pact could be im­mense and gen­er­a­tional.”

Seek­ing own­er­ship of decades-old, well-traf­ficked busi­nesses would rep­re­sent

a sig­nif­i­cant role re­ver­sal for com­pa­nies used to pour­ing bil­lions of dol­lars into ac­quir­ing cut­ting-edge tech­nol­ogy that’s un­proven in the mar­ket.

Fore­cast­ing big shifts in how peo­ple will ed­u­cate, en­ter­tain and even dress them­selves, Face­book has snatched up start-ups such as What­sApp, Ocu­lus and In­sta­gram. Mi­crosoft and Al­pha­bet picked up on­line soft­ware firms such as Mo­jang and Waze. Ama­zon and Ap­ple scooped up ro­bot builders. Those deals, de­spite their bil­lion-dol­lar price tags, mark pre­dictable pur­chases from the Sil­i­con Val­ley play­book.

But this group of tech in­dus­try gi­ants has more than $500 bil­lion in cash to burn, his­toric amounts fu­eled by bil­lions of Google searches, iPhone sales and on­line pur­chases. Their shares are hit­ting record highs, out­pac­ing growth in the broader stock mar­ket. And per­sis­tently low in­ter­est rates also have re­duced the costs of bor­row­ing cash to fund deals.

Con­glom­er­ates with in­ter­ests in var­ied sec­tors aren’t fa­vored by U.S. in­vestors. Their de­mands for fo­cus has spurred com­pa­nies such as Gen­eral Elec­tric and Hewlett-Packard to spin off divi­sions in re­cent years. But in­vestors have given more lee­way to top tech chiefs, in­clud­ing Ama­zon’s Jeff Be­zos and Mi­crosoft’s Satya Nadella, than to most of cor­po­rate Amer­ica.

The sup­port re­flects trans­for­ma­tions they’ve led in re­cent years. Mi­crosoft re­cov­ered from stum­bles in de­sign­ing smart­phones to be­come a leader in on­line stor­age tech­nol­ogy. Ap­ple is in­vest­ing in con­tent and ser­vices to diver­sify be­yond the iPhone, which ac­counts for about two-thirds of its sales. Ama­zon gen­er­ated lit­tle profit most of its his­tory, but sig­nif­i­cant in­roads in on­line ad and com­put­ing ser­vices have nearly tripled its warch­est to about $22 bil­lion over the last four years.

The cir­cum­stances add up to a recipe for big­ger and wilder in­vest­ments than the com­pa­nies may have once con­sid­ered.

“Big tech has been king,” said Daniel Ives, a for­mer stock an­a­lyst who over­sees cor­po­rate devel­op­ment for Syn­chronoss Tech­nolo­gies. “Their suc­cess has been ce­mented to a point where they can go on the of­fen­sive.”

Net­flix could tar­get a fancy the­ater chain, adding free show­ings as a perk for sub­scribers while giv­ing a lift to a busi­ness strug­gling to main­tain at­ten­dance. Al­pha­bet could match Ama­zon by mak­ing room for gro­cery chain Kroger or de­liv­ery com­pany FedEx. Tech ob­servers have dreamed of Ap­ple pur­chas­ing HBO or Tesla Mo­tors.

“It demon­strates the ca­pa­bil­ity that the largest tech com­pa­nies now have,” Cu­a­tre­casas said. “Mar­ket value is power. Cash is power. Tal­ent is power. They have all that, more so than any other com­pa­nies. And they have a global pres­ence.”

The lead­ing tech com­pa­nies of the 1980s and ’90s had nar­row vi­sions. When the World Wide Web emerged, com­pa­nies such as Sun and Cisco were the equip­ment providers. They had no rea­son to branch far afield from their core ex­per­tise be­cause hard­ware and soft­ware devel­op­ment was chal­lenge enough.

The gen­er­a­tion built upon the In­ter­net, which en­com­passes Ama­zon, Google, Face­book and Uber Tech­nolo­gies, didn’t man­u­fac­ture tech­nol­ogy or hold many hard as­sets.

Uber is ba­si­cally a new­era taxi firm. Face­book in essence is a me­dia com­pany, sell­ing ad­ver­tis­ing and cus­tomer data on the backs of a mas­sive staff of vol­un­teer con­tent creators. Ama­zon makes clever use of in­for­ma­tion to run a rad­i­cally new kind of sales, pric­ing, dis­tri­bu­tion and lo­gis­tics net­work that com­peti­tors are hard­pressed to repli­cate.

Con­sid­er­ing their suc­cess, the tech firms are bullish about bring­ing soft­ware ex­per­tise to new sec­tors, whether it’s truck­ing in Uber’s case or gro­ceries in Ama­zon’s.

The Whole Foods deal — un­like any other the lead­ing tech com­pa­nies have con­sum­mated be­fore — may still prove an out­lier.

Start-up in­vestors and ac­qui­si­tion con­sul­tants say most of the deal-mak­ing in the com­ing years will look more like Fri­day’s other sig­nif­i­cant move: Wal-Mart’s $310-mil­lion pur­chase of men’s ap­parel start-up shop Bonobos. It could give the na­tion’s big­gest re­tailer soft­ware cru­cial to keep­ing pace with Ama­zon pric­ing and rec­om­men­da­tion soft­ware.

“The tech dis­rup­tion is hap­pen­ing,” said Hrach Si­mo­nian, a gen­eral part­ner at Canaan Part­ners who led the firm’s in­vest­ment in gro­cery de­liv­ery start-up In­stacart. “It’s a land grab for tech­nol­ogy: You ei­ther get your paws on it or some­one else does.”

Tech com­pa­nies — com­ing from a po­si­tion of strength — can be more se­lec­tive.

It’s un­likely any would tar­nish their brands by ac­quir­ing a com­pany that doesn’t have a high-end ap­peal, said Aaron Sol­gan­ick, chief ex­ec­u­tive of Los Angeles tech in­vest­ment bank Sol­gan­ick & Co.

For in­stance, Sol­gan­ick doesn’t ex­pect Ap­ple to buy Ford any­time soon de­spite the iPhone maker’s grow­ing in­ter­est in mak­ing self-driv­ing cars and the fact that it has five times as much cash as likely needed to ac­quire the slump­ing auto gi­ant.

On the flip side, au­tomak­ers are iden­ti­fy­ing tech in­vest­ments of their own. It’s an open ques­tion, for ex­am­ple, whether they will stick with man­u­fac­tur­ing in the long run ver­sus farm­ing it out. That’s what Jaguar is al­ready do­ing with its I-Pace lux­ury elec­tric SUV, due in 2018. The car will be built by a man­u­fac­tur­ing con­trac­tor, sim­i­lar to Fox­conn build­ing iPhones for Ap­ple.

In the end, the ne­ces­sity of tra­di­tional in­dus­trial firms to adapt means fewer tech-buys-old-school an­nounce­ments than vice versa, Sol­gan­ick said.

Get­ting into re­tail, fi­nance or au­tos poses a risk of back­fir­ing. Tech firms are at­tract­ing in­creas­ing scru­tiny from gov­ern­ment reg­u­la­tors over col­lect­ing data about con­sumers. Hav­ing more en­try points for con­sumers would seem to add to data troves.

Cus­tomers of the ac­quired busi­ness may be turned off by what they con­sider over­reach. But Sil­i­con Val­ley gi­ants so far have demon­strated the abil­ity to leave in­de­pen­dent their ac­quired com­pa­nies — at least as tech start-ups go.

“Ama­zon will have the at­ti­tude of ‘How can we help?’ ” Cu­a­tre­casas said. “‘What can we do to help you give a bet­ter ex­pe­ri­ence to a Whole Foods cus­tomer?’ For it to go wrong, you would have to as­sume they would take over op­er­a­tions and I don’t see that hap­pen­ing.”

Mel Mel­con Los Angeles Times

THE PO­TEN­TIAL rip­ple ef­fects of the deal be­tween Ama­zon and Whole Foods rat­tled the in­dus­try, send­ing gro­cers’ stocks tum­bling. Ama­zon has used its pric­ing, tech and dis­tri­bu­tion to trans­form other re­tail sec­tors.

Makeda Easter Los Angeles Times

Source: Google Fi­nance. Data as of mar­kets close, 1 p.m. PDT. Graph­ics re­port­ing by

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