Amazon To Acquire Whole Foods In Mega Bet On Groceries
On Friday, global retailing’s pain just got worse when Amazon swooped on one of America’s biggest grocery chains in a near $US14 billion dollar deal that saw a sell-off in the sector around the world.
In the eyes of investors, retailing stocks here and offshore have been off the boil for more than a year as the online world, led by Amazon, grabs more sales and profits.
Now the impact comes to Australia where investors have been made more nervous by a series of alarmist reports from investment banks about the threat from Amazon.
Amazon has swooped on an upmarket retailer that has seen its appeal vanish, dragging down sales growth and the share price.
At the same time Amazon’s own efforts in groceries and food have struggled and not been as successful as many nervous Australian investors and ignorant analysts would have us believe.
Amazon will become the 5th biggest retailer in the US with the deal (presuming it is not overbid by a stupid hedge fund or private equity shark, which is hard to see seeing Amazon’s bid an all cash offer, something hedge funds are loath to do).
But the differing market shares tells us the real story of why the bid - Whole Foods had an estimated 1.21%, Amazon less than 0.2%. Wal-Mart leads with 14.5%, according of IBISWorld figures.
Whole Foods has about 465 locations, about 444 in the United States, 12 stores in Canada, and nine stores in the United Kingdom. There are 87,000 employees in 12 regions, according to the company.
Before the bid Whole Foods shares were half what they were four years ago at above $US62 each, against $US33.05 on Thursday at the close. Revenue growth has slowed to a halt from 10% gains a couple of years ago.
Amazon is buying a retailer with more than $US15.7 billion in revenue (in 2016) and gross profits of $US5.1 billion - but also one whose share price has tanked badly in the past couple of years. Amazon is paying a $US42 a share, or a 27% premium to the Thursday close.
Sales in the March quarter of this year slowed to a rise of 1.1% to $US3.7 billion and profits plunged 30% to $US99 million
It is Amazon’s biggest transaction ever and pushes deeper into groceries, a move that wiped $US34 billion off the value of some of the biggest names in US retailing and groceries and more than $US3 billion off the value of other retail linked stocks.
Kroger Co shares slid to close down 9.2% (and that was after a near 19% slump on Thursday on a very weak outlook that has become more worrying for investors, shares of Costco Wholesale Corp closed down 7.2%.
Shares in Target Corp, America’s second biggest retailer lost 5.1% and shares of Wal-Mart Stores closed down 4.6%, a drop of $US11 billion in value alone and the single biggest loser in the sector on the day.
Meanwhile, Amazon’s stock closed up 2.4% and Whole Foods shares surged 29.1% on Friday to $US42.68, after closing on Thursday at $US33.06.
The fallout also spread to Europe. Shares in UK supermarket giant Tesco Plc fell 4.9% and Carrefour in France fell 3.2%.
The takeover significantly boosts Amazon’s bid to disrupt the US grocery industry, an area where the company has been slowly building a greater presence over the past few years.
Charlie O’Shea, lead retail analyst at Moody’s in new York told the Financial Times, said the deal is a “transformative transaction, not just for food retail, but for retail in general”.
“Implications ripple far beyond the food segment, where dominant players like Walmart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks.”
Amazon sells much of its products to millennial consumers (books, appliances, clothes, video, music, and has an estimated 80 million members in its Prime club). Whole Foods grew by catering for the sale group, selling organic foods and taking it out of the small corner store and market to the mainstream of US retailers.
Trader Joe’s and Sprouts Farmers Market are major competitors in fresh foods. Trader Joe’s is owned by the same family that controls the giant german supermarket group, Aldi. Whole Foods has around 400 stores in the US (it has around 60 stores in the UK and Canada), Trader Joe’s has 461 outlets, Sprouts, more than 220.
US analysts say the acquisition, when completed, is not aimed at dominating the US grocery business (valued at an annual $US612 billion, according to IBISWorld), but Amazon is aiming at being among the top five in its core markets, places affluent millennials can be found: San Francisco; New York City; Boston; Austin, Texas; and Philadelphia.
But the purchase will bring greater retail skills, such as pricing, buying, advertising and logistics to Amazon’s own operations.
Amazon has been opening a limited number of book shops in some US cities such as Seattle, New York (one opened in the Time Warner building on Columbus Circle three weeks ago) and two are planned for the San Francisco area this year.
It had been planning to build a trial grocery shop/fulfilment centre that would allow consumers to use the store in real time (and like the book shops, be cashless). But technology problems have delayed the release.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.