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Amazon/Whole Foods Deal: Bezos Is Uniquely Positioned

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When Amazon chief Jeff Bezos offered over $14 billion to buy Whole Foods Market the scramble was on to figure out precisely the strategy going forward. Some envisioned a new age in food retailing featuring cashier free checkouts. Others envisioned robots stocking shelves. Some savvy Wall Street analysts see a combination of Amazon Fresh with Whole Foods impeccable reputation for quality.

My first reaction was that Jeff was just as appalled as any of us at the ridiculously high prices at Whole Foods and wanted to get some free gourmet grub. After all, Jeff is worth something like $78 billion. He didn’t get there overpaying for his daily bread. Anyway, a mere $14.3 billion is a drop in the shopping bucket.

The Real Truth

Only time will tell exactly what Amazon will do. The opportunities are pretty interesting. Two things stand out. Whole Foods may be a unique asset but it faces the basic truth that its strategy is no longer working. Its entire premium pricing structure is close to saturating its target demographic market.

Comparative store sales and average ticket size has been a problem for some time. There are too many competitors in the organic food segment like Sprouts Farmers Market and even Kroger that offer equal quality and far lower prices. Whole Foods stands out because it has created a special shopping experience.

From your first moment in a Whole Foods Market, there is almost a spiritual transformation that takes place. Immediately, you are engulfed in a higher level of quality that screams loudly starting with the products, how they are presented and the professional demeanor of the clerks.

WFM has created a superior image and translated that into superior pricing but there are only so many people in that are able to pay $4 for a Granny Smith apple and still pay the rent.

As is evident in the table below, having the highest gross profitability in the retail food industry exposes WFM to serious price competition. In the final analysis, consumers may prefer organic food but these days just about everybody but the corner hot dog vendor has a line of organics.

 

 

  Leading Grocery Chains
  Whole Foods Sprouts Kroger’s
Sales 100% 100% 100%
Cost of Sales 66% 71% 79%
Gross Margin 34% 29% 21%
SG&A 29% 22% 17%
Operating Margin 5% 7% 4%

 

 

Why Amazon Is A Unique Acquirer

The one major dig on Amazon since it earliest days has been its distain for maximizing short-term profits. Fact is Jeff Bezos operates the company more like a giant “growth at all cost” Venture Capital operation than a publically traded company.

His growth mentality and successful risk taking has made him on of the worlds richest men. If Amazon is truly a venture capital operation, it has defied the odds and succeeded over and over.

Consider the move that only Amazon could accomplish: if operating costs at WFM were lowered to the level of Sprouts through the magic of technology, selling prices could be cut the level of either Sprouts or even Kroger. Obviously income would take a reduction, but such a short-term outcome would be consistent with the Bezos habits. This type of strategy would allow WFM to appeal to millions of new customers.

As a freestanding company, public shareholders would never stand by and let WFM founder John Mackey get away with such a strategy. But under the umbrella of Amazon anything can happen.

Whole Foods has been a huge investment success. Back in the early 1990’s the stock sold for about $1.54 per share. The day Amazon’s offer was announced; the price ended the day just over $42. That is superior performance by any barometer. Now it time to let Jeff create new opportunities.

There are Wall Street rumblings of a bidding war developing over WFM. Anything is possible but few have the currency to match Amazon. If Whole Foods wanted to sell itself, it would have already had discussions with others. This type of talk is more rumbling than reality.