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Amazon – Whole Foods Is A Game Changer

18 June 2017

From Seeking Alpha:

Amazon has officially sent a shockwave through the grocery industry a day after Kroger  already reset expectations for the industry. The purchase of Whole Foods Market changes the retail landscape, and this time the grocery market, in a big way. As the Seattle-based online company is going offline, it creates severe competition for every bricks and mortar retailer.

I understand why investors are fleeing the grocery industry, which is set to become very tough or perhaps even uninvestable following this event. Amazon will add another huge market to its already very large addressable market, but this acquisition will become more capital-intensive than past expansion moves. I like this move, but the valuation remains an issue, as has always been the case.

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The deal terms are pretty simple and not that interesting. Amazon is paying $42 per share for Whole Foods Market, equivalent to $13.7 billion if net debt is included. Amazon CEO Jeff Bezos praised Whole Foods and stressed that he wants to continue to offer the best natural and organic foods, providing healthy food for people. For that reason, Amazon will continue to run the WFM brand.

While the $13.7 billion deal is huge in absolute terms, it is just a rounding error in relation to the $500 billion market capitalization of Amazon, trading at around $1,000 per share. The interesting feature is that both Whole Foods and Amazon cater notably to higher-end customers, which creates a nice overlap in the customer base and in both online and offline purchases. Connecting these data streams effectively gives the company almost a scary amount of insight into that customer.

Note that Whole Foods has a good store footprint both in terms of locations and productivity. Its sales of $15 billion make it a relatively small part of Amazon, which could easily post sales of $160 billion this year, ex-Whole Foods. Even if Amazon is not very profitable, it has tremendous cash flows, a very strong net cash position, very strong valuations, and a loyal investor base if it needs to raise cash in order to finance physical expansion.

The move sent a shockwave through the sector. Wal-Mart’s (WMT) $500 billion in sales are in part at risk. Of course, given the current footprint of Whole Foods, the risks to sales erosion at Wal-Mart in the near term will be limited. However, over time this could change the landscape dramatically. The 6% drop in Wal-Mart’s shares alone is equivalent to the deal price paid for Whole Foods. The 3% jump in Amazon’s share price ironically corresponds to the value being paid for Whole Foods as well.

Link to the rest at Seeking Alpha