Amazon.com Inc. recently announced the acquisition of Whole Foods Market for $13.7B. Will the deal lift AMZN stock even higher?
The internet has been abuzz ever since news emerged that Seattle, Washington-based Amazon.com Inc. (NASDAQ:AMZN) has made a bid to buy Whole Foods Market (NASDAQ:WFM). In what will be Amazon's biggest acquisition to date, the e-tailing giant made a $13.7B bid to acquire the grocery chain. Moreover, Amazon made an all-cash deal, which is surprising given the size of the deal. The news saw WFM stock rocket 28% higher in the last trading session, to trade around the proposed deal price of $42 a share. However, looking a bit deeper into the deal, the Whole Foods acquisition could be a really smart move by the Jeff Bezos-led behemoth, which could lift Amazon stock to greater heights in the time to come.
Shares of Amazon closed the last trading session at a price of $987.7 a share, up from $750 at the start of the year. AMZN stock price is up by 31.7% in the year-to-date, crushing the 14.3% gains of the Nasdaq Composite (INDEX:COMPX). And if the WFM bid is any indication of Amazon's intentions, Amazon stock might be headed far higher. Here is why.
A Foothold In A $700B Market
The 450+ store strong WFM chain will provide Amazon with a foothold in the grocery market, which is estimated to be worth $700B currently. As reported by Reuters, the acquisition will help Amazon to test out how to take on the 800-pound gorilla of the industry, WalMart, which rakes in over 50% of its sales from the grocery market. Of late, the lines between traditional retailing and e-commerce have been blurring, with both Amazon and WalMart encroaching into each other's territories. The WFM acquisition puts Amazon on a collision course with WalMart in the grocery space. This follows the acquisition of Jet.com, by WalMart, last year as the giant retailer attempted to take the fight to Amazon in the online space. With Amazon ready to pay $13.7B in cash for Whole Foods Market, it obviously has a strong reason for the deal.
A Boost To Amazon Fresh
The Whole Foods Acquisition will help Amazon to reduce the last-mile delivery for Amazon Fresh, its own grocery delivery service. Jose Alvarez, a senior professor of business administration at Harvard Business School hit the nail on the head when he said, "Amazon needed to find ways to reduce last-mile delivery for grocery, the last frontier of e-commerce in the United States. This acquisition gives Amazon more than 400 convenient locations in key Amazon Fresh [Amazon’s grocery delivery service] cities where consumers can pick up their groceries, eliminating huge costs for Amazon as it strives to penetrate the grocery e-commerce space. For Amazon Fresh to be successful, the company also needed to acquire more expertise in perishable grocery procurement. This deal gives Amazon a seasoned group of perishables specialists."
There had been rumors earlier of offline presence being the next growth driver of Amazon. Well, the WFM acquisition is a first clear step in that direction and as Jose pointed out, the move should help Amazon reduce last mile delivery costs while also helping to scale up the Amazon Fresh service to many more cities (where WFM is present). A last-mile delivery solution in the grocery business could also be used to reduce the delivery times in the non-grocery business segments. Maybe Amazon will buy more retailers? or set up own physical stores? Pure speculation right now, but you never can never guess what Bezos will come up with next.
Efficiency Improvements Using Amazon Go Tech?
At the fag end of the last year, there was the talk of Amazon Go, an 1800 sqft store without human employees. As we had written earlier, Amazon Go has the potential to revolutionize the retail industry. The Whole Foods market acquisition might just provide Amazon with a lab to test out the Amazon Go tech at a greater scale, with each WFM store measuring nearly 40000sqft. If Amazon can successfully leverage its Amazon Go expertise to drive down operating costs at WFM, the acquisition could turn out to have multiple benefits for the giant e-tailer, all at improved profitability at the WFM stores.
In summary, the WFM acquisition holds multiple benefits for Amazon.com Inc. Whole Foods Market provides Amazon a foothold in a huge industry with recurring purchases, while also helping the company scale its Amazon Fresh initiative by using these as fulfillment centers. If Bezos can successfully implement the 'Amazon Go' tech across these stores, Amazon might get all these benefits while also driving profit margins of the WFM business higher. These are only some of the reasons why the WFM acquisition could be a huge wealth creator for Amazon stockholders.
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