AMZN - Amazon.com Inc.

[TorontoRaptorsFan]

Perhaps Amazon is hoping to cover two bases: online is geared for the mass market and retail will be more luxury retailers.

Is a clothing retailer next?

[Parsad]

Amazon.com buying Whole Foods!  I didn't see that coming.

 

Really good decision by Amazon!  WFM stores are already in high net-worth areas that probably have a high volume of Amazon users. 

 

Will affect Walmart and Costco, but other grocery stores should be even more worried.  If you thought margins were slim in grocery...they are going to get shaved some more!  Cheers!

[GregS]

I’ve been thinking about this all day.  Everyone should be as this deal may have implications for more anything in tech or retail.  I completely doubted the rumors this would happen because 1) I thought AMZN would want to build out its own network its own way and 2) I didn’t think AMZN needed a brand.  So my knee jerk reaction is this is a bad idea, but I’m trying to think through it strategically. 

 

Scott Galloway predicted this would happen and gave this rationale:

GALLOWAY: Grocery is probably the most ripe consumer sector to be disrupted in all of the consumer world. It’s the largest consumer sector in the world about a 750 billion dollar market just in the US. But if you go into the middle of a supermarket in his spin yourself around and you open your eyes it would take you awhile to figure out you’re not in 1985. Same bad lighting, same bad brands and oftentimes the same depressed clerk checking you out. Whole Foods came in and offered something different and better.

 

Unfortunately, it was just too damn expensive. And there’s some people doing a great job — there’s Wegmans and Trader Joe’s. But when you look at the size of the market there’s still huge opportunity. My prediction is that Amazon will acquire an organization like a Whole Foods or Wegmans as they have not figured out grocery. They need distribution and these companies have been beaten up, some of them have been beaten up so badly that they might be worth the acquisition price just for the distribution. They could close the stores down and just use them as warehouses.

 

Well, yes and no.  Grocery is ripe for disruption, but if you are just doing this for distribution and turning Whole Foods stores into warehouses you could lease your own space or buy a distressed retailers for a fraction of the cost.

 

The biggest takeaway is that Amazon has not figured out grocery.  They are buying Whole Foods first and foremost because they want in on grocery and have realized what everyone else predicted, which is that grocery is too hard.  Hell, Mackey himself said grocery would be Amazon’s Waterloo.  Even if they could do it themselves, it could take maybe 10 or 20 years to get to where Whole Foods is now.  This speeds that up.

 

I’m not sure when Amazon Go technology will be ready, but WFM’s new 365 concept looks a lot like Amazon envisioned for that.  Of course, 365 is in its infancy so I do wonder why Amazon wouldn’t go it alone, but this goes back to the first point that grocery distribution is too hard or time consuming to build themselves.

 

Delivery is a huge part of this, and Whole Foods is already doing it, and Amazon believes they can do it better (the biggest immediate loser is Instacart).  It’s pretty easy to imagine integrating Amazon’s other technologies – add items to your shopping list via Alexa and schedule deliveries 1 or 2 times a week.  How about sending your other orders to the Whole Foods store and delivering them along with your groceries? (this solves the problem of delivery space in inner city apartments, because you have to be home for grocery deliveries)  If you are going with any pie in the sky predictions, this is where you start.  Of course, I’ve glossed over major logistics issues here but that is what Amazon has been good at.

 

I’ve heard some suggest they will make Whole Foods a Costco-style membership with Prime.  Maybe.  I think it’s more likely Prime will get you free delivery.  This is important, because delivery is not cheap and so the stores add fees that add a lot of friction to grocery transactions.  It’s hard for customers to justify delivery fees on small orders, but my experience is that it is time consuming to do a large order and usually it’s easier to just go to the store.  Make that process easier with Amazon tech and basically “free” with Prime and you are less likely to shop elsewhere.

 

What about Whole Foods’ brand?  No way this deal gets done with Mackey if they were going to jettison it.  More likely Whole Foods Powered by Amazon or something like that.  Again, this goes back to my first point about grocery being hard – I think Bezos respects what Mackey brings to the table.  However, I think one of the biggest reasons Amazon chose Whole Foods was that it was essentially for sale.  Whole Foods is doing this from a position of weakness.

 

Speaking of that, how about those WFM margins?  My view of WFM (expressed in that thread) is that the margins are too high and competition fierce with strong new entrants.  I think that’s still true and we all know Amazon runs tight margins.  Name another potential buyer with the long term vision and investor patience to transition WFM into a lower margin company.  Funny thing is that accounting rules may end up forcing a goodwill write down in the next couple of years as this works out.  Ignore it.

 

What’s next?  I think Amazon’s willingness to buy an entire chain is a big deal.  Many are pushing hard on the idea that this is about distribution centers.  And it is – for groceries.  You can’t shove everything into Whole Foods.  Will Amazon follow this model for other industries?  Which ones?  Electronics?  Pharma?  Clothing?  Household goods?  Or is grocery special?

 

Anyway, long post but I’m just thinking out loud and trying to get a handle on this.  I was amazed as I was writing this how much more sense this transaction made to me.  I think if this fails it’s because (as oddballstocks’ better half points out) Amazon kills the brand, and/or because grocery delivery just inherently sucks.

 

[Liberty]

If the rumor that Amazon is interested in Slack is correct, it could mean a change of M&A strategy.

[bargainman]

The AOL/Time Warner moment for this generation?

 

no:

"AOL would purchase Time Warner for US$164 billion...  The new company will be 55 percent owned by AOL and 45 percent owned by Time Warner. The combination will immediately boast a market capitalization of $350 billion and an annual revenue stream topping $30 billion."

 

Amzn Market Cap : 472.101B

WFM: 13.639B

 

Not even close in scale.  This is pocket lint/petty cash for AMZN.

[BTShine]

If I was AMZN, I'd buy Nordstrom (JWN) next.  Only another $10 - $15 Billion to get that one in the fold.  Can't think of another nationwide retailer in the calibre of these three  (JWN, WFM and AMZN).

 

Maybe Macy's or JCPenney to go downmarket, too.  $7 Billion and $1.5 Billion market caps respectively.

[Mephistopheles]

I think "retail is dead" never applied to groceries like it did to clothes and electronics. I looked at WFM some time ago but didn't pull the trigger because I didn't see a moat vs Trader Joes and other upscale grocers. But I never thought that online would be a threat to these guys.

[GregS]

If the rumor that Amazon is interested in Slack is correct, it could mean a change of M&A strategy.

 

Dennis 'Cutty' Wise:

The game done changed.

 

Slim Charles:

Game's the same, just got more fierce.

[doughishere]

I think "retail is dead" never applied to groceries like it did to clothes and electronics. I looked at WFM some time ago but didn't pull the trigger because I didn't see a moat vs Trader Joes and other upscale grocers. But I never thought that online would be a threat to these guys.

 

The vampire squid seems to think its going to be more of a "evolution than revolution."

http://www.goldmansachs.com/our-thinking/podcasts/episodes/06-16-2017-elsesser-posnett.html

[Spekulatius]

Really interesting transaction.  Not sure how to think about it.  I think it goes against the "retail is dead" theory.  Amazon, an exclusive online retailer wanting to get into the physical space.  There is real value to physicality.

 

We were talking about this at our house today.  My thought is Amazon slaps their name on Whole Foods locations.  My wife thinks Amazon's influence kills the brand.  Who knows.

 

I've noticed that Amazon is the Walmart of the current generation.  It's 'cool' to shop there, even if they're just an online Walmart.  They're on the same trajectory as Walmart circa 15-20 years ago as well.  I remember the thought that Walmart would end up taking over EVERY small town to the point where people would only have a single store to shop in.  It didn't happen like that.  I doubt Amazon will do the same.

 

At least Amazon purchased a high priced retailer.  Grocery is a terrible business for margins.  There aren't as many economies of scale either.  I worked at a grocery store and I know some products have to be sourced locally.  It isn't economical to be shipping milk nationwide, instead it's purchased from distributors locally.  Same with bread and other goods, all through different local distributors.

 

Maybe this is Amazon's AOL/Time Warner moment.  Or maybe it isn't.

 

If I were any grocery I'd be concerned about Aldi.  They continue to improve, their prices are very reasonable, and most of what they offer is organic.  They have their own natural/organic brand that isn't full of processed ingredients and the prices are rock bottom.  Between them and Walmart the local chains are struggling.  There's a local chain in our area that's tried to re-invent itself as a local Whole Foods.  They have more 'healthy' items and marked up food like crazy.  As long as we have people ignorant of health and food they will have customers.

 

I think it is clear that between the entry of the German Discounters (Aldi, Lidl) and Amazon's entry, the grocery business is getting mixed up. Since I am a German transplant, I cannot fail to notice, how inefficient most regular grocers are run in the US. Walmart tried to get into the German market, but failed. I was in one of their stored and prices were middling and not cheaper than a run of the mill superstores groceries, much less The Discounters. They simply could not reproduce their advantages that they have in the US in Germany.

Note, that the Trader Joe chain is owned by Aldi. Aldi in the US is very competitive pricewise, but I don't think the stores hit the sweet spot yet. I think some middling grocery stores like Safeway, Krogers, Albertsons and Public have their work cut out for them and I don't think all of them survive. If I could, I would short Bagger and card handler jobs.

 

AMZN entry is interesting and I think they will use Whole Foods stores as a jumpstarter for their grocery business and blend bricks and mortar with online.

 

The whole thing seems to be negative for commercial retail as well. Notice that many shopping centers rely on grocery anchor stores now to keep traffic, because they are considered internet resilient.

[HJ]

Perhaps WFM is the only grocer Amazon could have reasonably bought.  One thing about grocers is that the gross margin is so low to start with (with the exception of WFM), that the business model needed the "last mile" to be solved by the customers themselves.  What perhaps Amazon bring to the table in this circumstance is an ability to add technology on the back end, like figuring out more efficient ways to deal with waste & slippage (maybe have their suppliers absorb them somehow?, not necessarily last mile delivery or client interface. 

 

 

[doughishere]

In 1999, instead of Amazon, I talked about Cisco Systems [CSCO]. I said that at the growth rate on which it was being valued, it would be 25% of the US economy in 10 years. Well you could say the same thing about Amazon - to justify 150 times earnings, you have to assume it will be 25% of the US economy in 10 years. Not likely.

 

http://www.barrons.com/articles/sam-zell-speaks-his-mind-1497675229

[Liberty]

https://www.gwinvestors.com/2017/06/16/battle-whole-foods-isnt/

[Guest longinvestor]

Bezos's stated preference is for not wanting to sell for high prices. Is he trying to learn the other way from Whole Foods?

[Parsad]

Bezos's stated preference is for not wanting to sell for high prices. Is he trying to learn the other way from Whole Foods?

 

Bezos will get distribution efficiency from WFM, so prices at WFM will come down.  Combined with the scale of purchases AMZN can get, they will get discounts from producers like WMT does.  AMZN's entry bodes well for consumers.  But also massive disruption in the grocery workforce and how we will make grocery purchases going forward.  Cheers!

[arcube]

+1.

Bezos's stated preference is for not wanting to sell for high prices. Is he trying to learn the other way from Whole Foods?

 

Bezos will get distribution efficiency from WFM, so prices at WFM will come down.  Combined with the scale of purchases AMZN can get, they will get discounts from producers like WMT does.  AMZN's entry bodes well for consumers.  But also massive disruption in the grocery workforce and how we will make grocery purchases going forward.  Cheers!

[Guest longinvestor]

Bezos's stated preference is for not wanting to sell for high prices. Is he trying to learn the other way from Whole Foods?

 

Bezos will get distribution efficiency from WFM, so prices at WFM will come down.  Combined with the scale of purchases AMZN can get, they will get discounts from producers like WMT does.  AMZN's entry bodes well for consumers.  But also massive disruption in the grocery workforce and how we will make grocery purchases going forward.  Cheers!

 

Get the feeling that some of the customers that shop Whole Foods want to pay the higher price. Like Yuppies who don't like to keep the company of bargain hunters at places like Walmart. Plus, suppliers like supplying to WFM over Walmart because of generally higher prices. Interestingly, I got to visit a frozen packaged veggies manufacturer in the midwest and they were desperate for more Whole Foods biz while hating Walmart and Roundy's (regional grocery) whom they also supplied(like most of what they made); The love/hate was about pricing and terms. Interestingly all the food they make comes off the same line  ;)

[Liberty]

WFM break fee is $400m.

 

https://www.sec.gov/Archives/edgar/data/1018724/000119312517205287/d352949d8k.htm

[wabuffo]

I'm skeptical about this purchase.  Leaving aside some of Amazon's other businesses (AWS, Kindle/Alexa, etc), I thought Amazon basically exploited two advantages versus other retailers:

 

1) eliminated the need for expensive store square footage by going direct to consumer from a warehouse (unlike, say, WMT) and using Prime membership fees to cover some of the last mile expense.

2) willingness to go after high margin retailers with a low/no margins biz model.

 

With Whole Foods, Bezos is in essence replicating a self-distributing supply chain (supplier-warehouse-store-consumer) that every grocery retailer already has -- so where's the competitive advantage vs. WMT?  Grocery is already a very low margin business (1% net margins) -- what's the advantage that AMZN brings to this business?

 

In addition, Whole Foods has a strong culture of employee engagement that translates to customer loyalty.  The first messages being broadcast to these new employees is "we're replacing you with automated, self check-out throughout the store".  This has the makings of a JC Penney like catastrophe where current Whole Foods customers who like it as-is, leave en masse only to come back slowly, one at a time over a long time frame, if ever.  Meanwhile the business bleeds massive red-ink.  I know red-ink doesn't scare Bezos, but the size here is potentially very large, even for him.  You also have the existing founder of Whole Foods in place who might resist too much change at "his baby", at least initially.  Lots of change management issues here, I think.

 

Whole Foods suppliers may also balk -- particularly in what will be a drastic change in payables terms (Whole Foods is a very fast payer, AMZN one of the slowest).

 

One last note -- this is the biggest acquisition ever done by AMZN.  Do they have the middle management chops to integrate an acquisition this large?  It was a very loud and very public shot across the bow to the grocery and mass merchandise industry (much of it unionized).  Could this draw anti-trust, and Federal govt scrutiny?  Again -- Bezos has some experience fighting the state govts (ie. sales taxes).  But I think this acquisition puts AMZN squarely on the radar of the government as competitors, unions complain, I think.

 

Just my 2-cents and I would never bet against Jeff Bezos.  I know there are other factors at play here like Whole Foods stores being in the same zip codes as high-spending Amazon Prime members, and much talk about conquering the last mile delivery problem in grocery, etc.  But I don't think this is a slam-dunk, either.  I'm probably just a "dinosaur" who doesn't "get it".

 

wabuffo

[topofeaturellc]

I'm not convinced of this.  In food amzn/wfm is a 3% market share operator. Wmt and KR are multiples higher, and AMZN has never successfully run a fresh supply chain before.  It just seems overly simplistic to just assert AMZN will get supply efficiencies.  And WFM isn't seen as being particularly good at it for cost.  Probably what they are is the best available option that knows how to do private label cpg at a non-value price/quality point.

 

What I find most interesting is what AMZN wants to do with the stores.  If turns out they want them to do pull and pick that's actually pretty positive for traditional grocers as amzn is saying that format isn't yet able to be obsoleted.

 

That said hard to see how this doesn't make business permanently harder for traditional grocers. Just I'm not sure it's a head shot.

[GregS]

I'm skeptical about this purchase.  Leaving aside some of Amazon's other businesses (AWS, Kindle/Alexa, etc), I thought Amazon basically exploited two advantages versus other retailers:

 

1) eliminated the need for expensive store square footage by going direct to consumer from a warehouse (unlike, say, WMT) and using Prime membership fees to cover some of the last mile expense.

2) willingness to go after high margin retailers with a low/no margins biz model.

 

With Whole Foods, Bezos is in essence replicating a self-distributing supply chain (supplier-warehouse-store-consumer) that every grocery retailer already has -- so where's the competitive advantage vs. WMT?  Grocery is already a very low margin business (1% net margins) -- what's the advantage that AMZN brings to this business?

 

In addition, Whole Foods has a strong culture of employee engagement that translates to customer loyalty.  The first messages being broadcast to these new employees is "we're replacing you with automated, self check-out throughout the store".  This has the makings of a JC Penney like catastrophe where current Whole Foods customers who like it as-is, leave en masse only to come back slowly, one at a time over a long time frame, if ever.  Meanwhile the business bleeds massive red-ink.  I know red-ink doesn't scare Bezos, but the size here is potentially very large, even for him.  You also have the existing founder of Whole Foods in place who might resist too much change at "his baby", at least initially.  Lots of change management issues here, I think.

 

Whole Foods suppliers may also balk -- particularly in what will be a drastic change in payables terms (Whole Foods is a very fast payer, AMZN one of the slowest).

 

One last note -- this is the biggest acquisition ever done by AMZN.  Do they have the middle management chops to integrate an acquisition this large?  It was a very loud and very public shot across the bow to the grocery and mass merchandise industry (much of it unionized).  Could this draw anti-trust, and Federal govt scrutiny?  Again -- Bezos has some experience fighting the state govts (ie. sales taxes).  But I think this acquisition puts AMZN squarely on the radar of the government as competitors, unions complain, I think.

 

Just my 2-cents and I would never bet against Jeff Bezos.  I know there are other factors at play here like Whole Foods stores being in the same zip codes as high-spending Amazon Prime members, and much talk about conquering the last mile delivery problem in grocery, etc.  But I don't think this is a slam-dunk, either.  I'm probably just a "dinosaur" who doesn't "get it".

 

wabuffo

 

I agree with this. Which is why I think Whole Foods stores will be operated more or less the same as they are now, at least for awhile.  The tell is Mackey staying on. Amazon will primarily be working with delivery.

 

What I find most interesting is what AMZN wants to do with the stores.  If turns out they want them to do pull and pick that's actually pretty positive for traditional grocers as amzn is saying that format isn't yet able to be obsoleted.

 

Yes. But if Amazon figures out delivery, they will do it better and cheaper than anyone else and traditional grocers will lose that business. I don't think stores will be obsoleted but what happens at the margins Can have huge impact.

[topofeaturellc]

Realistically if amzn figures out fresh grocery delivery w/o needing storefronts  the only one investment question will be what the recoveries will be on the senior secureds for KR and wmt

[SlowAppreciation]

I'm not convinced of this.  In food amzn/wfm is a 3% market share operator. Wmt and KR are multiples higher, and AMZN has never successfully run a fresh supply chain before.  It just seems overly simplistic to just assert AMZN will get supply efficiencies.  And WFM isn't seen as being particularly good at it for cost.  Probably what they are is the best available option that knows how to do private label cpg at a non-value price/quality point.

 

What I find most interesting is what AMZN wants to do with the stores.  If turns out they want them to do pull and pick that's actually pretty positive for traditional grocers as amzn is saying that format isn't yet able to be obsoleted.

 

That said hard to see how this doesn't make business permanently harder for traditional grocers. Just I'm not sure it's a head shot.

 

Agreed — I think people are focusing too much on supply efficiencies as if they're a foregone conclusion. This thinking assumes COGs comes down. I'm not sold on this, plus grocery is a whole different supply chain with different dynamics. So I'd wager Amazon just spends some time observing/learning, and will largely leave the existing chain in place for the time being.

 

But I do think Amazon can do some interesting things with in-store operations, private label goods, and driving more value for Prime users.

 

1) In-store Operations — cashiers and stockers probably account for $2-$2.5b in SGA expense at WFM each year. Amazon probably feels good about their Amazon Go concept. Might not be ready this year, but over a ~5 year period, I'm sure it will come a very long way. Eliminating this cost would fall directly to the bottom line.

 

2) Private Label Goods — amazon already has this with "AmazonBasics" and it's been successful. I see no reason they won't continue on this trend, and it's worked quite well for Trader Joe's.

 

3) More Value for Prime Users — Tons of opportunities to make Prime more valuable here. Prime member-only sales on certain products, Costco-like membership benefits, etc.

 

And instead of seeing a more profitable Whole Foods, we'll probably just see a much more affordable one as Bezos is likely to pass along all the savings to customers a la WMT or COST.

[DTEJD1997]

Hey all:

 

It will certainly be interesting to see what happens with WFM, especially in relation to Krogers.

 

I took my Dad out to breakfast and we had quite a discussion about this.  He made a good point that some people like to pay higher prices.  These high prices keep the "hoi polloi" and differentiates the shopping experience at these higher end stores.

 

He prefers to shop at Krogers, but will sometimes go to the Wal-Mart.  He has gone to WFM a few times, but finds the prices outrageous.  He concedes that they have very nice stores and nice products.

 

Would he shop there if they lowered prices?  Maybe...but they would have to be at the point where they are near WMT or Kroger.  What would happen to WFM if they lowered prices to this level?

 

A). I presume that their margins would collapse to the point where they are losing money.  To counter that, they may move more volume.  They may also attempt to get more efficient by cutting staffing levels.

 

B). If prices are lowered, the "Hoi Polloi" might come flooding in.  If that happens, the landed gentry probably will take their business elsewhere.

 

C). what is the "angle" in taking over a high end grocer?  If they turn it into a Wal-Mart or Aldi, then what is the point?  If they want a super price sensitive store, why take over WFM?  Why not take out a "regular" grocer?

 

D).  Why not simply open your own locations?  AMZN certainly has the financial heft to do this.

 

Finally, there are some WFM locations here...not a lot but a few.  Most of these locations are in high rent locations.  They are in such high rent locations that most of these locations are physically constrained.  For example, narrower isles, smaller meat & seafood counters, reduced prepared foods, etc.  If AMZN is going to use these as distribution centers, how?  They barely have enough room to do what they normally do in their course of business.  HOWEVER, there is a WFM that was opened on the outskirts of town that DOES have space...I wonder how many WFM are older/space constrained?

 

E). I suspect that some percentage of people like to shop at WFM for customer service.  If this is cut back, they won't shop there.

 

I have a hard time seeing how AMZN integrates WFM well.

[clutch]

My first hunch is that WFM will become membership based (either WFM's own membership fee or part of Prime). And the membership fees will be used to lower the cost, create fast delivery / checkouts, and increase the selections.

 

Source:

 

:)