Amazon and Whole Foods: What Experts Think Will Happen

Amazon (Shutterstock photo)Amazon (Shutterstock photo)

Over the past two years, the battle between Amazon (AMZN) and Walmart (WMT) for all of your consumer dollars has ramped up considerably, with the public battle between the two companies over shipping goods, Walmart acquiring Jet and Amazon building out grocery stores.

Now, after Amazon's proposed purchase of Whole Foods, the battle has gone from a series of small surges from both parties to a full-out war.

By bringing Whole Foods under the Amazon umbrella for $13.7 billion, Amazon not only continues to further expanding into groceries -- a near $800 billion market -- but it adds additional places for it to have other retail items closer to people's homes. It can use Whole Foods stores to keep expanding Amazon's lucrative third-party business, an area where it generates significantly higher margins than items sold directly by Amazon. 

"We believe Amazon's strategy is to utilize the Whole Foods locations as local distribution points of both food and potentially other items, and to capitalize on Whole Foods' organic private label brand, 365 Everyday Value," BMO Capital Markets Peter Solar wrote in a research note following the acquisition.

Jefferies analyst Christopher Mandeville noted that although the details of Amazon's plans with Whole Foods are vague, he sees it as "disruptive" to the entire grocery vertical, including suppliers, distributors and retailers.

"For [Whole Foods], the merger will provide it with a much needed jolt to its digital/online capabilities while [Amazon] receives a high quality brand with a loyal customer base and physical presence that could enable the online retailer to augment/enhance its current food delivery strategy," Mandeville wrote in a research note.

Judging by the initial reaction, other grocers are going to feel the pain, as investors scurried away from companies like Target, Kroger's, Costco, Sprout's, and yes, Walmart. 

The online grocery market is a huge opportunity, growing 15% in 2016 to $48 billion, according to research from Kantar Worldpanel.  The Whole Foods acquisition is just another prong in Amazon's plan to attack this market, Pivotal Research analyst Ajay Jain noted.

"For Amazon, Whole Foods consolidates what could have been a multi-year process of investing in its own food retailing initiatives, including Amazon Fresh and Amazon Go," Jain wrote in a note to clients. "Although Whole Foods' fundamentals have continued to deteriorate over the past three years, it is still a very high quality asset with an exceptional brand name."

Amazon could also make it easier to get customers their groceries, as Whole Foods has more than 460 stores in the U.S., U.K. and Canada. One way to think about it is that Amazon added another 460 warehouses around the globe for almost $14 billion in cash.

A combined team of Whole Foods and Amazon is no doubt a blow to Walmart, which had been experiencing a renaissance of sorts after its acquisition of Jet.com in late 2016 and having Jet CEO Marc Lore (who sold Quidsi to Amazon years ago) run its e-commerce operations. 

Though Amazon hasn't spoken about it publicly, there is speculation that the deal could give Amazon more physical locations to sell Amazon-branded electronics. If that does indeed happen, it's a powerful selling tool for Amazon for Whole Foods customers to do their grocery shopping and then seeing a demo of the Amazon Echo.  

And this is nothing to say about the operation Whole Foods is running on its own. Last year, the company did approximately $16 billion in revenue, certainly nothing to sneeze at. 

Cantor Fitzgerald analyst Naved Khan noted the idea is "potentially transformative transaction for Amazon and for the industry overall," as it marries the best of offline and online grocery shopping.

For Amazon, the deal gives a number of benefits, perhaps the most important being more data from Whole Foods' customers. But as it keeps adding to the benefits of Prime (which could help Whole Foods sales grow, Khan said), it also gives them an advantage over Walmart and the ability to "increase in customer wallet share from the local grocery stores," which should be music to shareholder's ears.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Technology , Investing Ideas , Stocks
Referenced Symbols: AMZN

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Chris Ciaccia

Chris Ciaccia


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