Amazon’s (NASDAQ: AMZN) $13.70 billion purchase of Whole Foods Market (NASDAQ: WFM) might be the beginning of a brick and mortar buying spree by Jeff Bezos.
There are several good reasons for Bezos to go shopping for brick and mortar acquisitions. These reasons include:
- Brick and mortar is very cheap right now; Kroger (NYSE: KR) just picked up 16 Marsh supermarkets in Indiana for just $16 million. That price included a choice downtown location in Indianapolis. SUPERVALU (NYSE: SVU); a grocer that reported $14.97 billion in revenues on February 28, 2017, had a market capitalization of $1.08 billion on June 12, 2017. Rite Aid (NYSE: RAD) (the nation’s third largest drugstore with 4,553 locations); reported revenues of $32.85 billion on February 28, 2017, and a market capitalization of $3.161 billion on June 16, 2017.
- Amazon needs to reduce delivery costs. Much of its profit margin is going straight to delivery companies like UPS (NYSE: UPS) and FedEx (NYSE: FDX). One way to do this is to operate brick and mortar locations where customers can pick up merchandise and drop off returns. Another is to tap solutions like Uber, Lyft and Deliv or create a delivery app to reduce costs.
- The Everything Store wants to expand its grocery business. Purchasing supermarkets would give it neighborhood fulfillment with refrigerators and shelves. These can double as pickup and drop-off points for merchandise and generate additional revenue through traditional retail sales.
- Going brick and mortar will let Amazon accept cash payments for merchandise ordered online. Cash is still a huge part of the economy; 32% of all transactions and more than 50% of all purchases in the United States in 2015 were made with paper money, the Federal Reserve Bank of San Francisco reported. Walmart is already accepting cash payments for online orders at its’ stores.
- Amazon needs to fend off aggressive challenges from Walmart (NYSE: WMT), Kroger, Alphabet’s (NASDAQ: GOOG) Google Express, Target (NYSE: TGT) and others. Alphabet (NASDAQ: GOOGL) Kroger and Walmart actually seem to be ahead of Amazon in critical areas like same-day delivery and “click and pull (online orders picked up at a store).” Amazon needs to play catch up in this area fast.
What Brands will Amazon Acquire Next?
Amazon has ample rationale to go acquiring and plenty of cash to do it with. The company reported $21.53 billion in cash and short-term investments; and $16.81 billion in cash from operations, on March 31, 2017.
The question we need to ask is: “what companies will Amazon acquire next?” Some probable candidates for Amazon acquisition include:
- Barnes & Noble (NYSE: BKS) – Jeff Bezos loves books and has a soft spot for physical bookstores. Purchasing this chain would enable him to expand his Amazon bookstores. It would also generate a lot of great publicity because Amazon would be “saving a bookstore.” It would also be very cheap; Barnes & Noble had a market cap of just $492.78 million on June 16, 2017.
- Uber Technologies Inc. – The ride sharing service is in a lot of trouble right now. It is facing criticism, lawsuits and possibly a federal criminal investigation. To top it all off CEO Travis Kalanick has taken a “leave of absence.” Buying Uber would give Amazon access to a lot of great technology including self-driving vehicles and trucking. One real asset for Amazon would be UberEATS the food delivery service. It would also give Amazon access to an established delivery service and a highly experienced network of drivers around the world. An added bonus would be keeping it out of a competitor’s hands. The price would have to come down from the ludicrous $70 billion valuation for Bezos to buy.
- Instacart – The grocery delivery unicorn has loyal customers, expertise and technology. There is also the added incentive of keeping Instacart out of Kroger’s hands.
- Deliv – Like InstaCart this unicorn is a natural target for Amazon because it has expertise, technology and drivers the Everything Store needs. Amazon will also want to keep Deliv out of Walmart or Kroger’s hands.
- Rite Aid (NYSE: RAD) – Amazon reportedly wants to enter the pharmacy business. Rite Aid has 4,553 locations and $32.85 billion in revenues with a market cap of $3.161 billion. If Walgreens’ (NASDAQ: WBA) acquisition attempt fails expect Amazon to make a bid.
- Best Buy (NYSE: BBY) – Like Whole Foods, Best Buy is something of a best in industry brand with a loyal following. Owning it would give Amazon a larger presence in electronics and expertise. It would also be a good place to pick up and return electronics purchased through Amazon.
- BJ’s Wholesale Club – This company is a sort of poor man’s Costco (NASDAQ: COST) that operates mostly in the Northeast. Amazon was seriously considering buying it as a cheap way to get warehouse space earlier this year, Fortune reported.
- Office Depot (NASDAQ: ODP) and Staples (NYSE: SPLS) – The office supply chains are in big trouble but they have established delivery networks and brick and mortar locations Amazon can use. One asset at these chains is their established shipping businesses. Another is relationships with businesses and government agencies. These chains are also very cheap; Office Depot had a market cap of $2.8 billion on June 16, 2017, and staples had a valuation of $5.748 billion on the same day.
- Wegmans – This smaller regional grocer has been ranked America’s best grocer by Consumer Reports for years. So like Whole Foods, Wegmans is a best in the industry by. Buying Wegmans and combining it with Whole Foods would expand Amazon’s grocery business in the Northeast and give it a lot more expertise.
- Sprouts Farmers’ Market (NASDAQ: SFM) – This discounter is the second national organic and natural grocery chain and it is growing fast but making less money much like Whole Foods. Folding Sprouts into Whole Foods would make a lot of sense for Amazon.
- Safeway – This large grocer; which now owns Albertson’s, is controlled by Cerberus Capital Management. Buying Safeway would give Amazon 1,326 supermarkets; numerous regional distribution centers, dairies and bakeries, and entrance into new fields including fuel sales and pharmacies. One logical step would be to let all Amazon Prime members participate in Safeway’s club card program which gives members a discount on gas in exchange for grocery and pharmacy purchases.
Amazon is the dominant player in online retail. It is now on the verge of establishing a huge presence in brick and mortar. One has to wonder if politicians and the Federal Trade Commission (FTC) will let it.