Kroger (NYSE: KR) and Walmart (NYSE: WMT) are winning the grocery wars. Whole Foods Market (NASDAQ: WFM) has given up and sold out to Amazon (NASDAQ: AMZN).
A press release indicates that Jeff Bezos plans to spend $13.70 billion in cash; or $42 a share, for the upscale organic supermarket chain. The purchase would give Amazon an additional $15.86 billion in revenues, and 460 stores in the USA, Canada and the United Kingdom. Many of those stores are in choice locations in upscale neighborhoods.
It also gives Amazon one of America’s best-loved; and most-respected retail brands, and access to a lot of great brick and mortar retail know how. Amazon also gets access to Whole Foods’ brands – which it can sell through its’ online marketplace.
Victory for Kroger
Despite the hysterical claims of online commentators this acquisition marks a major victory for Kroger. The nation’s largest grocer now dominates the organic sector; its’ sales of natural and organic products are projected to reach $16 billion in 2017, exceeding Whole Foods’ total revenues of $15.86 billion.
Kroger has damaged Whole Foods severely by successfully copying its’ organic; and precooked meal, sales strategy and undercutting its’ prices. It has also figured out organic marketing, Seeking Alpha contributor Harshal Patel estimated that Kroger’s Simple Truth natural products brand is now worth $1 billion. Kroger sold $1.5 billion worth of Simple Truth products in 2016.
Kroger has also been moving aggressively into upscale groceries; buying Mariano’s parent Roundy’s, Harris Teeter, a stake in Lucky’s, and Murray’s Cheese in recent years. It also has created a number of experimental high-end grocery stores; including Main & Vine in the Seattle area.
Naturally this makes Kroger a value investment right now. The grocery giant’s stock was trading at $21.63 a share on June 16, 2017. Yet it reported growing revenues of $115.34 billion on January 31, 2017. A lot of people are going to make a lot of money whenever Mr. Market wakes up to Kroger’s true value.
Expect more Major Grocery Acquisitions
Frankly I’m not surprised by this acquisition given the pain in the grocery business and Whole Foods’ recent struggles (it started closing stores in February) we should have expected it. One regional grocer Marsh just declared bankruptcy and got liquidated.
Expect to see more grocers collapse and companies, some from outside the industry gobble them up. Next on the chopping block will probably be Sprouts Farmers Market (NASDAQ: SFM); which has been growing fast but struggling with falling earnings – just like Whole Foods.
Don’t be surprised if Kroger; or its’ privately held rival Safeway, acquires Sprouts to counter Amazon’s Whole Foods play. Other possible buyers for Sprouts include Walmart, Aldi and Lidl Stiftung & Co. KG; the parent of Lidl, (which already owns Trader Joe’s).
Other grocers that might collapse include; Winn Dixie, HEB, SUPERVALU and regional chains in the west and Northeast. Expect Amazon, Kroger, Lidl Stiftung & Co. KG and Safeway to go on a major grocery buying spree this year.
Why Did Amazon Buy Whole Foods?
Amazon’s purchase of Whole Foods is logical but counterintuitive. On the surface the deal seems crazy but there are some good reasons for it including:
- It helps Amazon reduce delivery costs; by providing brick and mortar pickup and return locations for merchandise.
- It allows Amazon to start selling merchandise ordered online for cash through the stores. Walmart.com is already doing this. One of Amazon’s weaknesses is that it cannot accept cash payments. Around 32% of payments in the US were cash in 2015 according to the Federal Reserve Bank of San Francisco. Cash still dominated in some areas of the spending around 52% of food and personal care purchases in 2015 were made with cash. Also more than 50% of purchases under $25 were made in cash in 2015.
- The Whole Foods stores can serve as local fulfillment centers for Amazon’s same-day delivery efforts. Amazon can now deploy an Uber-type app that would enable contract drivers to deliver meals and groceries from Whole Foods. The same drivers can deliver other merchandise ordered through Amazon dropped off at Whole Foods stores by Amazon’s fleet of trucks.
- Amazon now gets access to Whole Foods stable of brands including 365, and Engine 2. It can counter Kroger’s Simple Truth by marketing these through its online marketplace and its grocery delivery service.
- Amazon can now start marketing groceries and hot meals from Whole Foods through its website. These can be delivered by drivers based at the local Whole Foods.
- Amazon gets Whole Foods’ most valuable asset; some of the best and most experienced people in the grocery business. Amazon can now pick the brains of thousands of highly experienced managers, cooks and associates.
- It counters Walmart’s aggressive marketing of its’ stores as pickup and return locations for merchandise ordered online.
What Will Amazon Buy Next?
This brings us to the logical question what will Amazon buy next? Well there are a now of potential targets out there including; Barnes & Noble (NYSE: BKS) which had a market cap of $480.10 million on June 16, 2017. Buying Barnes & Noble would enhance Amazon’s reputation by “saving” a brick and mortar bookstore.
Another potential target is Rite Aid (NYSE: RAD) buying it would get Amazon into the pharmacy business. Such an acquisition is possible if the Federal Trade Commission (FTC) blocks Walgreen Boots Alliance’s (NASDAQ: WBA) acquisition attempt. There is also Sprout’s which is cheap; it was trading at $20.99 a share on June 16, 2017, and Best Buy (NYSE: BBY) – which would give Amazon local electronics outlets.
Amazon will have to move carefully here because any acquisition might attract the attention of the FTC. There have been some grumblings about Amazon in the media, and President Trump has been a vocal critic of the company.
One thing is certain the Whole Foods acquisition is not the last. Expect the grocery business to change beyond recognition in the next few years.