Amazon-Whole Foods tie-up could speed grocery transformation

Amazon entry fears to hurt investor sentiment
Amazon Welcomes You To The New World Order: Reflections On The Whole Foods Acquisition
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20 June, 2017

Presumably, Amazon will absorb Whole Foods into its AmazonFresh service. That changed on Friday. Once stalwarts of the industry, Sears, J.C. Penney and Macy's are closing hundreds of stores. They have included well known names across many sectors: Gymboree, Sports Authority and Payless Shoes have all filed for bankruptcy within the a year ago. The fast food chain had the deal through the 2020 games in Tokyo but it's pulling out three years early. Its price-to-economic book value of just 1.1 suggested that the market expected the company to grow NOPAT by no more than 10% over the remainder of its corporate life. While retailers have long competed against WalMart, Costco and other big box retailers, the Amazon/Whole Foods combination creates a substantial new challenge by combining price and delivery services (where permitted by state law). It wasn't until 2015 that the number of pure grocery stores actually started to decline, according to government numbers, and then only slightly.

With top line growth outpacing the overall growth of online sales, it's clear Amazon is grabbing market share even as the market leader. "But grocers have to respond and move faster now".

- On June 16, Whole Foods shares closed at $42.68, above the agreed sale price.

According to Ansara, Whole Foods is known for being specific about where its stores are located.

President Donald Trump's pick to lead the Justice Department's antitrust division, Makan Delrahim, has worked since 2005 as a lawyer and lobbyist at Brownstein Hyatt Farber Schreck, a firm that is registered to lobby on behalf of Amazon.

Grocers have been trimming jobs through innovations like self-service checkout lanes.

Benchmark Research analyst Daniel Kurnos also expects a bidding war, but he said: "Amazon will ultimately be able to outbid any other party by a meaningful amount, given the valuation gap between them and WFM".

The deal further cements Amazon's remarkable rise from an online bookseller of the 1990s to a seller of broad-based goods with mastery over supply chains and logistics, a dedicated group of subscribers through its Prime program and an increasingly honored creator of original entertainment.

Reportedly Amazon was not only interested in Whole Foods.

Since 2002, Amazon has used a pioneering approach that makes its technology infrastructure not simply a powerful back-end, but perhaps the most impressive computing platform in the industry today.

"Are cars off limits to Amazon?" said Levinsohn.

And since millennials have a long-standing relationship with online shopping, such a competitive advantage is key. The news, which sent the shares of organic grocery chain up 29%, last Friday, took the investors by surprise and rung an alarm bell for other major food and retail stocks.

But part of the problem has also been the need for short delivery distances for perishable items. With the deal, Whole Foods' more than 460 stores become a test bed with which Amazon can learn how to compete with Wal-Mart's 4,700 stores with a large grocery offering that are also within 10 miles (16 km) of 90 percent of the USA population.

"It potentially turns these brick and mortar stores into distribution centers", Olson said.


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