Shares of Whole Foods soar, but other grocery sellers get crushed. Amazon, which is getting blamed profusely for the meltdown of brick-and-mortar stores and malls across the US, and which has been dabbling with its own initiatives into brick-and-mortar operations, including bookstores, after nearly wiping bookstores off the face of the US, said it would buy brick-and-mortar Whole Foods Market for $13.7 billion. Amazon will get Whole Foods’s $15.7 billion in annual sales and more importantly, its brand, semi-loyal customers, and about 450 brick-and-mortar stores across 42 states. Whole Food shares jumped 27%. But in early trading, the shares of the largest brick-and-mortar grocery sellers in the US are getting crushed:
*Wal-Mart Stores -6.5%
*Kroger, largest supermarket chain in the US, -14%
Amazon already sells groceries online via AmazonFresh, and a few months ago announced it would create a grocery store pickup service, another foray into brick-and-mortar.
Selling groceries online has been tough in the US, though everyone has been trying, from innumerable startups to Safeway and Google Express (in cooperation with Costco et al.). Consumers are used to buying at the store by running through the aisles with their carts and choosing what they see or what’s on their list, or both, and they want to touch and check their produce before buying it, and they don’t want the dented apples or squished grapes or wilted lettuce. And they need it now on the way home from work so they can fix dinner.
With this acquisition, Amazon’s efforts to muscle its way into the grocery business and even more into the every-day lives of Americans have thus taken a quantum leap forward.
But what industry is Amazon muscling into?
Over the past six years, sales at grocery stores are up a total of 14%, not adjusted for inflation, according to the retail trade report by the Commerce Department. Over the same period, the Consumer Price Index for food rose 14%, according to the Bureau of Labor Statistics. Hence, on an inflation-adjusted basis, “real” sales have been flat for six years.
Amazon has a huge luxury: Its shares trade at a sky-high PE ratio of nearly 200, as its earnings are paper-thin, and the market doesn’t care. The shares of brick-and-mortar retailers get destroyed with profit margins this thin. Amazon can borrow cheaply on the strength of its shares and can use them as collateral. It can also issue an unlimited number of new shares to raise cash if it needs to, or to buy other companies, and in this manner use the shares as an over-inflated currency. It can raise money this way to pay back its debts, and creditors know this. It’s one of the many distortions of what has become a crazy stock market.
“Whole Foods Market will continue to operate stores under the Whole Foods Market brand and source from trusted vendors and partners around the world,” Amazon said in its press release. “John Mackey will remain as CEO of Whole Foods Market and Whole Foods Market’s headquarters will stay in Austin, Texas.” The deal puts Amazon bigly into the brick-and-mortar grocery space, after German mega-discounters Aldi and Lidl announced huge expansion projects in the US, and after numerous smaller supermarket chains have sought refuge in bankruptcy court. Big player, Albertson’s, which also owns Safeway, scuttled its IPO in 2015 due to the brick-and-mortar meltdown. It now appears that the PE firms and other investors that own it are stuck with the money-losing over-indebted enterprise that is now also dogged by sharply deteriorating same-store sales.
Amazon isn’t going to make it easier for them.
Even Whole Foods, once the shining star, has fallen on hard times. Its products with an aura of “natural” and “organic” have become common at Costco, Safeway, Kroger, Albertson’s, and all the others, at lower prices. Its shares as of yesterday have lost half their value from their peak in late 2013. Same-store-sales have dropped consistently since late 2015. For the past two years, revenues have been essentially flat and profits have been shrinking.
Whole Foods has been hounded by its second largest shareholder, activist hedge fund Jana Partners, and by money manager Neuberger Berman to put itself up for sale in order to spike the beaten-down shares. This has now happened. Amazon agreed to fork over $42 a share, a 27% premium to the closing price yesterday. It expects the deal to close later this year.
But nothing, not even Amazon, can boost grocery sales in the US. Most Americans are already eating enough, or more than enough. And price competition, with the expansion of the German discounters into the US, will heat up further.
Amazon’s acquisition and Aldi’s $5 billion bet in the US comes at a brutal time....