Quick Thoughts: AMZN + WFM = Synergies and Options

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Artur Pylak


psagawa@ / apylak@ssrllc.com


June 16, 2017

Quick Thoughts: AMZN + WFM = Synergies and Options

  • AMZN’s surprise $14B deal for WFM fuels its grocery move, with opportunities to operate WFM better and use its stores to serve AMZN’s wider interests.
  • The WFM brand will be an important quality signal to skeptical consumers for AMZN’s push into perishables, positioning it with its Pantry as a one-stop on-line grocery store.
  • AMZN can improve WFM operations – data driven purchasing, logistics, merchandizing, and loyalty, in-store tech, etc. – yielding lower costs and greater customer satisfaction
  • WFM 431 stores become forward outposts for AMZN – local delivery depots, showrooms for AMZN products, etc. – integrated with Prime and Alexa

AMZN investors had spent 24 hours evaluating rumors that the company was about to spend $9B on enterprise messaging platform Slack when it dropped the bomb that it was buying WFM for $14B. The orthogonal contrast between the whispered deal and the real one (and the consideration that both would be sensible) is a testament to AMZN’s extraordinary competencies and Jeff Bezos’ vision. The WTF acquisition makes a lot of sense.

The obvious point is that Amazon has been edging into grocery for years. The Prime Pantry program, which has its best customers regularly ordering big boxes of non-perishable items for a fixed delivery fee, adds blissful convenience to a main element of the Costco strategy, sucking business from the middle aisles of the local grocery store. Amazon Fresh has been delivering perishable items to Seattleites since 2007, but has struggled to build a broader presence against several obstacles, the biggest of which is consumer reticence to buy vegetables or meat that they haven’t seen in the store with their own eyes.

Buying Whole Foods is virtue signaling to Prime members that Amazon can be trusted to deliver food that you would want to eat – vegetables, meat, fish, baked goods, dairy, prepared foods, etc. – allowing consumers to skip that annoying trip to the market. Amazon will know not to try and foist the bruised apples, gristly steaks, or near expiration milk on its beloved prime members, and the provenance of those items is well understood within Whole Foods’ carefully constructed brand reputation. A quick demographic gander suggests that the overlap between Whole Foods shoppers and Amazon Prime members is nearly perfect.

Amazon can make Whole Foods quite a bit better as well. Prime members will undoubtedly get discounts, which will allow Amazon to collect lots of information about them to drive superior merchandizing. Amazon’s wizardry in purchasing and logistics will yield lower costs/prices and more appropriate stocking. Expect in store tech, like smart carts, self-checkout, and instant couponing. Look for Whole Foods’ lower priced 365 pilot stores to merge into Amazon’s super-automated grab-and-go concept initiative.

Whole Foods’ 431 stores will also become forward platforms for Amazon’s businesses. 431 local delivery depots located close to the relatively upscale neighborhoods where its best Prime customers live and providing volume to justify self-operated delivery fleets. 431 showcases for Amazon technology – image Alexa answering questions in each aisle, perhaps with informed knowledge on the buying history of each customer. 431 boutiques for Amazon products and services, like Kindles, Echos, and Prime Video. 431 sites to launch new initiatives, like a rumored move into pharmacy.

So far, investors seem to like this deal, and they should. It also signals a departure from Jeff Bezos apparent reticence to do big acquisitions and, perhaps, a willingness to do even bigger ones in the future. Given the breadths of Amazon’s ambitions, this puts everything from Netflix to Salesforce on the table. It also could be a spur to Amazon’s frenemies, like Alphabet and Facebook, who haven’t pulled the trigger on anything of size in a while. With the potential of a cash repatriation festival later this year, it could mean a nice bonus season for bankers this Christmas. Meanwhile, we believe Amazon can beat consensus growth expectations for as long as the eye can see.

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