E Amazon's Acquisitions Create Adverse Reactions

The reality is far more innocuous than the reaction sometimes. When Amazon (AMZN) announced its acquisition of Whole Foods Market (WFM) it sent waves through the retail industry. Waves generally being a natural factor in a relative sea of tranquility that is the ocean doesn’t quite equate contextually on Wall Street. Unfortunately, waves on Wall Street tend to assimilate with context surrounding the aftermath of an earthquake, devastating and demonstrative. The devastation in the retail sector of Wall Street, after the announced acquisition, found retail stocks under immense pressure and not the type of pressure that creates lustrous gemstones. Having said that, some investors will find themselves holding diamonds once the rubble is cleared. 

Conjecture and knee-jerk reactions play a large role when trading, but a lesser role when investing. The intelligent investor is able to sift through the conjecture, headlines and knee-jerk stock reactions and see a more vivid picture that disseminates truth and reality. The headlines surrounding Amazon’s acquisition of Whole Foods Market coupled with the broader retail sector adverse sell-off would have one believe Amazon would dominate grocery… starting next week. But that reaction to the news is anything but reality and everything inclusive of hyperbole. The chart by CNBC below is a breakdown of the U.S. Grocery Market share as of 2016:

Combined, Amazon and Whole Foods Market only account for less than 2% of the total U.S. grocery market. What many traders and investors may not fully appreciate for lack of industry knowledge and/or experience is that Whole Foods Market is a very specialized grocery retailer and with a very small retail footprint when compared to its peers. While the once darling of Wall Street for several years found what seemed to be an ever-appreciating share price, in the last couple of years, that performance found itself short lived and with steep declines. Whole Foods Market’s business and total addressable market (TAM) was not what it once claimed it was to be.For years the grocer outlined a path to some 1,200 stores across America only to find itself nearing saturation of the region with fewer than 500 stores and as same-store-sales (SSS) began declining. There comes a point in every business model cycle where newness and low-hanging fruit is all picked cleaned and what you are left with is a mature business that expresses its true demand and value.As such, Whole Foods Market found sales floundering and earnings falling under the pressure of pricing, assortment, competition and generally difficult YOY comps. 

It’s a tough business to create let alone to do so with as much success as Whole Foods Market has found. On Wall Street, you are either growing to the moon or you become a value stock. And that is what Amazon believed it found in Whole Foods Market, a valuable entity that could advance its desired grocery expansion. It’s not easy to distribute groceries to the masses solely from a digital marketplace and as such, the Whole Foods niche market offers Amazon a small, but potentially lucrative advancement in the category. Evidencing that mass market scale was unachievable by Whole Foods Market itself, not to mention peers like The Fresh Market and Sprouts, it will take some Amazon tweaking of the Whole Foods business model and many years before the realization of this venture is known for its value. But again, traders have already reacted to headlines despite the logical deductions offered within. 

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Disclosure: I am long TGT and COST.

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Comments

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Harry Goldstein 10 months ago Member's comment

Good comment thread. Another good thread to read with a similar discussion is here: www.talkmarkets.com/.../winner--losers-from-amazons-proposed-purchase-of-whole-foods

Carol Klein 10 months ago Member's comment

#Walmart acquired #Jet to compete with #Amazon. Now Amazon wants to acquire #WholeFoods to compete with Walmart. I don't think Walmart's acquisition did a think for them. Hopefully Amazon's will work out better for them $WMT $AMZN $WFM

William F. Lampe IV 10 months ago Member's comment

That acquisition was only completed in late September of last year. I think it will take time for results to really show for Walmart, so I wouldn't write off that acquisition yet... Not to mention that Walmart payed approximately 20% of what Amazon paid.

Carol Klein 10 months ago Member's comment

Walmart acquired Jet to get a very much needed technological edge over Amazon. But have you ever shopped at Jet? I have. It pales in comparison to Amazon's technical knowhow and breadth of features/reach. There is no comparison. In fact overall I found Jet's website to be buggy, boring and confusing. And shipping is as slow as Walmart. I saw no advantage to the acquisition.

Do you see it differently?

Fabrizio Galvez 10 months ago Member's comment

I definitely agree, i think that $AMZN is just so much better at what they do that it is sort of insulting to compare them to Walmart. I always say that Amazon is sort of like $APPL in the sense that they may not be the first to do something, but they are always the ones to make it better, and this will definitely be the case.

Seth Golden 10 months ago Author's comment

The food and logistics supply chain is dry complicated, cumbersome and wildly expensive. I like the comparison offered, but it's highly unlikely that in this particular case, "better" is going to be the outcome.

William F. Lampe IV 10 months ago Member's comment

I personally found Jet to be relatively easy to use and visually pleasing, but that is more personal opinion I suppose.

My point was more about how it's too early to tell at this stage. Anything could happen with Walmart and Jet, or Amazon and Whole Foods, so I don't think it's prudent to write off one of their acquisitions

Carol Klein 10 months ago Member's comment

It's been a while since I shopped at Jet. But I found their process of getting extra savings by buying items from similar warehouses to be very confusing. Overall it was difficult to understand how much I was paying for each item. And I found those numbers often changed. For instance, if I added an item to my cart it would list thousands of items that I could get cheaper. But wanted they didn't mention is that the savings would only apply if I added ONE item, I would not get more savings by adding more than one item. Also, if purchasing many items, it was hard to keep track of which item was linked to savings on which items. So if you deleted an item from your cart later, you might lose the extra discount on something else which may have been the only reason you added it to your cart in the first place.

Without the additional savings, every item I looked at was cheaper on Amazon. Just a very confusing model over all. And that was the only technological enhancement I even saw. Otherwise the website was extremely basic. The search function was dismal and their item selection was pretty limited and ever changing. So there were many times I bought an item I liked and wanted to re-order it, but when I tried, I found they no longer carried it.

I will say they had very good customer service though. Something Walmart could benefit from but which I fear might work the other way around. At least Walmart's customer service is as poor as ever. Personally, I wouldn't mind if Amazon put Walmart out of business with the exception that competition is good for the consumer.

William F. Lampe IV 10 months ago Member's comment

Don't forget the logistics network that $AMZN is bringing to Whole Foods! That being shared between the two companies could reduce costs for both of them.

Seth Golden 10 months ago Author's comment

Grocery logistics is far different than what Amazon understands or has experienced proficiency with. That is what they are actually acqui omg in the deal, not bringing to the table. On a mass scale Amazon doesn't have scaled expiry, chargeback and DSD experience as they don't have those busines relationships or operations.

Angry Old Lady 10 months ago Member's comment

"Grocery logistics is far different than what #Amazon understands or has experienced proficiency with." = Hitting the nail on the head. $AMZN $WFM

Bill Johnson 10 months ago Member's comment

Seth Golden is exactly right. This is uncharted territory for Amazon. I'm not saying they will fail, but I think they are going to have a harder time of it then they expect.

Bruce M. Knoth 10 months ago Member's comment

Amazon does sell food online, so I would argue that they do have a lot of experience. And they certainly have the $$ to hire more people with more direct experience.

Seth Golden 10 months ago Author's comment

selling food online and doing so successfully are two different indicators. Their market share clearly indicates they don't have good experience and know how or likely the right skill sets and personnel.

William F. Lampe IV 10 months ago Member's comment

I agree with Knoth, they have started #AmazonFresh, and their partnerships with shipping companies can help them expand with less growing pains. That, and they have some of the greatest minds in the field of supply chain! Who knows what other knowledge and experience those minds hold.

BreakingBad News 10 months ago Member's comment

Actually Amazon started their own shipping company. But I would think super markets use their own workers as delivery men rather than using UPS.

William F. Lampe IV 10 months ago Member's comment

But look at their same day shipping roll outs: the distribution network is already very promising!

Seth Golden 10 months ago Author's comment

The grocery business is highly complex and complicated to maintain, nonetheless maintain profitably over extended periods of time. It's one thing to sell groceries that are dry goods as Amazon has and will continue to do, it's an entirely different thing to sell cold, frozen and dairy foods. Expirations, shelve lives and the necessity of sourcing locally is NOT in any way shape or form something Amazon has done on scale or with any proficiency along the lines of what I've noted within. Moreover, there is a profound reason as to why the major beverage companies have a dominant position within the grocery supply chain inclusive of DSD operations. Again, this is not something that is available to Amazon and obviously as such Amazon has NO experience with this such aspect of the grocery business. The beverage and snack business make the grocery business profitable, most everything else outside of meats is considered minimal profit to losses. Amazon likely understands this as it has been trying for many years now to expand its grocery business to include greater sales volumes, but without a DSD, high volume business it has been extremely difficult. So you buy Whole Foods with local sourcing DSD operations and all that comes with the business of selling cold, frozen dairy goods. Having said all of that, Amazon will still likely not be successful without large scale modifications to the Whole Foods business model as Whole Foods has a very finite consumer base. Again, Amazon likely understands this but most importantly...and here is the biggest takeaway as we share this experience going forward: Amazon doesn't care. Amazon doesn't care because its shareholders don't care. We're talking about a company that went unprofitable were over a decade and with the stock price doing nothing but appreciating over that time period. So while we banter and rationalize this acquisition whichever way we choose to do so, no matter what the outcome, shareholders will likely continue not to care as the core Amazon business has proven disruptive and, now, more profitable than ever. Maybe the real question is can Amazon do no wrong? Thank you all for the comments and sharing!

William F. Lampe IV 10 months ago Member's comment

I can't agree that Amazon and it's stockholders do not care. Amazon has had those long periods of operating on losses in order to innovate and expand, which has shown tangible success! As for the DSD operations, you have a great point, and much more experience looking into this industry than I, however looking back at amazon's expansions into new fields, I find historical precidence to back up my feeling that they will successfully find a way to set up those local DSD connections, or work around their lack of them.

I have to thank you for responding to my comments as well Seth, this has been a great discussion!