The whole caboodle
There are sexy deals and then there’s Amazon buying bourgeois grocer Whole Foods. I love everything about this acquisition — the quantum (a cool Us$13.7bn, the biggest in Amazon’s 23-year history), that no-one saw it coming and, mostly, because it’s a tacit admission that bricks-and-mortar retail ain’t going anywhere.
Here’s the numbers stuff: the deal will add $16bn in revenue to Amazon’s top line, which is expected to top $200bn next year. Amazon is paying $42/share, representing a forward p:e of 32.
SA doesn’t really have a Whole Foods comparison. The closest I can come up with is this: imagine, if you will, the love child of Woolies, Wellness Warehouse and the Neighbourgoods Market. With its attractively located stores and brand credibility, it is a catch. Then again, with an extensive fulfilment network, hordes of shopper data and deep pockets, who’d turn Amazon down?
It’s important to know this: Amazon has tried, with tepid results, to sell groceries online. It wants to be in this space: annual US grocery sales are estimated at $700bn-$800bn. And we know it has figured out how to distribute goods. But some shoppers just don’t want to buy papaya and steak online.
What the deal (and by deal I mean 460 stores) does is narrow Amazon’s physical proximity to shoppers. It achieves the company’s overarching (perhaps pimp-like) desire to turn itself into a more frequent shopping habit.
That the tie-up took the market by surprise is testament to the presumption that cloaks the retail gorilla. It pioneered online shopping and now, with physical stores — not just Whole Foods but Amazon Books and cashierless convenience store Amazon Go — many are asking what the hell the company is. Regardless of the transaction platform, Amazon’s vim and pandering towards the unconventional will continue to mystify.
Whole Foods needed the deal. Activist investor Jana Partners acquired a stake of more than 8% earlier this year and began pushing for a buyout, frustrated by a sluggish stock price and glacial turnaround. Also, same-store sales have declined for seven straight quarters as competitors have moved into Whole Foods’s niche.
When it comes to the fragmented US grocery market, keep these three moving parts in mind, because a war is brewing. Buying Whole Foods is the latest salvo in Amazon’s battle with Walmart. The escalation in efforts by German discounters Aldi and Lidl to spread across the US must not be underestimated. And apart from the big guns — Kroger, Safeway and Publix — there is a slew of upstart companies that have a loyal base: Instacart, Freshdirect and Blue Apron.
e:
The long game
When the deal goes through, Amazon and Whole Foods will account for roughly 3.5% of grocery spending in the US. Amazon boss Jeff Bezos is not a 3.5% kind of guy. But he is patient, at the expense of profit. He wants to be a big player and he’s prepared to bleed money for years.
That’s enough excitement for one deadline — next week I’ll get into all the ways Amazon could use Whole Foods. ( Dun...dun...dun...)
I’ll leave you with this (please, enjoy): last year, Amazon passed Volkswagen to become the world’s biggest corporate spender on research and development, Bloomberg says, spending a cool $17.4bn on it in 12 months. That’s more than Roche, Novartis and Pfizer, Alphabet, Intel or even Apple.