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Whole Foods’ Buyout by Amazon, Worries Wal-Mart & Others


The retail landscape is undergoing a fundamental change with technology playing a major role, and the perfect example of the same is the last week’s deal between Whole Foods Market, Inc. WFM and Amazon.com Inc. AMZN. 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.

The e-commerce giant entered into an agreement to acquire Whole Foods for $42 per share in an all-cash deal valued at roughly $13.7 billion, including net debt. The transaction, which is expected to conclude during the second half of 2017, has triggered a debate whether consolidation is the demand of time.

How the Deal Benefits Whole Foods?

For quite some time now, the Retail-Supermarkets industry has been grappling with stiff competition, food price deflation, an aggressive promotional environment and declining store count that has gravely hurt the margins. This is quite evident from the industry's performance in the past one month, when it declined 5%. A reflection of the same can be found in Whole Foods dwindling comparable-store sales performance.

The company witnessed a 2.8% dip in comparable-store sales during the second quarter of fiscal 2017, following a 2.4% decline in the preceding quarter. Comparable-store sales had fallen 2.6%, 2.6%, 3% and 1.8% in the fourth, third, second and first quarters of fiscal 2016, respectively. Management expects comps to decline as much as 2.5% during fiscal 2017.

Nevertheless, Whole Foods has been revamping pricing strategy, concentrating on value offerings and introduced a new store concept, "365 by Whole Foods Market", in view of heightened competition as more companies are expanding their presence in the Organic & Natural food business. These players include The Kroger Co. KR, Sprouts Farmers Market, Inc. SFM and Wal-Mart Stores Inc. WMT.

We believe that the deal could provide Whole Foods a competitive edge. At one end it will allow the company to reach a wider customer base who prefer shopping online, while on the other end it will help lower procurement costs, given Amazon’s huge bargaining power. Not to forget, Amazon’s technological prowess could be of significant advantage to Whole Foods against its peers – who are aggressively expanding their online presence – and could help lower operating costs. This will allow this Zacks Rank #3 (Hold) to pass on the benefits to customers. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What the Deal Means for Amazon?

Analysts are looking at this mammoth acquisition as an amalgamation between online marketplace and physical stores that could bring a massive change in the retail industry going forward. Industry experts believe that rather than perishing, retailers with more or less same business line would prefer joining hands.

Coming to the deal, the buyout of Whole Foods will give Amazon an easy access to roughly 460 stores in the U.S., Canada and U.K. and a foothold in the grocery business. Amazon through its AmazonFresh service has been trying to take a pie of $700–$800 billion U.S. food market. Experts see this acquisition as a major step by Amazon to thwart any threat coming from Wal-Mart, which holds a dominant position in the U.S. food market and has been gradually building up its e-commerce strength.

Amazon has been in the spotlight for the last few years, as changing customer patterns have made the retail industry more dependent on e-commerce. It had earlier announced its plan to acquire online retail platform Souq.com to tap into the Middle East market. The company entered the Chinese market with the buyout of Joyo.com, an online retailer of music, books, videos and DVDs.

Meanwhile, Wal-Mart has been steadily making its way in the fast-growing online retail market. This is quite evident from the retail bellwether’s recent buyouts, which include Jet.com, a U.S.-based e-commerce company; ModCloth, an online clothing seller; Moosejaw, an outdoor apparel and gear retailer; and ShoeBuy, an e-commerce shoe retailer. The company is on track to acquire Bonobos, a men's clothing e-commerce company, for $310 million.

Other retail giants too are following the same path. Retailers are focusing more on enhancing their omni-channel capabilities, optimizing store fleet and restructuring activities. But for now, Amazon’s bold move has compelled food and retail companies to revisit their strategies and prepare for more aggressive price war waiting ahead. Shares of Wal-Mart, Target Corporation TGT, Costco Wholesale Corporation COST and Kroger tumbled 4.7%, 5.1%, 7.2% and 9.2% last Friday, following the news.

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