Jeff Bezos, Amazon (NASDAQ:AMZN) CEO, famously bought the domain relentless.com in 1994, and today it redirects to amazon.com. Bezos and Amazon and been relentless indeed, proving that no industry is safe, not even your local grocer.
Bezos, with the purchase of Whole Foods (WFM) for nearly $14 billion, puts Amazon in a very large market that is desperate for disruption. Amazon's own attempt to crack the grocery industry, notably with its grocery delivery service AmazonFresh, hasn't done so well. However, Amazon does have an opportunity when it comes to private labeling consumer packaged goods. It also gets an immediate storefront in over 400 locations across the country.
The Whole Foods buyout is just 3% of Amazon's market cap. But it can have a major impact on the bottom line over the next decade. FMI-Nielsen has a report that suggests online grocery spending will grow from just 4% of food/beverage sales today to 20%. The big overhang with online grocery shopping has been effective and efficient delivery. By buying up Whole Foods, Amazon is now that much closer to the end customer.
Amazon wants to offer something for everybody, effectively putting it square at odds with Wal-Mart (NYSE:WMT), and less so with other middle market grocers like Kroger (NYSE:KR), as I've mentioned here. I'll provide more thoughts on Kroger and the Amazon-Whole Foods implications in the coming days.
For Amazon, it's a race to beat Wal-Mart.
The plan is to cut the headcount at Whole Foods, which will save a lot on SG&A. Ultimately, we could see Whole Foods resemble the AmazonGo format that Amazon is rolling out - which has no cashiers. As well, it'll lower prices to make the retailer more competitive with Wal-Mart. It's already started the quest to take low-income shoppers away from Wal-Mart by offering a reduced Prime subscription price for those on government assistance. In addition, Amazon will start accepting food stamps for grocery items.
Perhaps one of the big overlooked opportunities for Amazon is to stock Whole Foods with its own private label products - i.e. AmazonBasics, which is a win-win, meaning more direct revenue for Amazon and lower prices. Focusing on cheaper private label goods is exactly what's made Trader Joe's so successful.
Then there's the big thesis I mentioned earlier, the last mile.
With grocery delivery, it's about the small distance from the final distribution location to shoppers' homes. Delivering fresh goods has been uneconomical, until now. Amazon will have the scale and a massive installed base of Prime subscribers, where it can set up a delivery network that can serve multiple locations in a tightly clustered area with one trip.
For Amazon, it's not about 8-mile, nor The Green Mile, but rather the last mile. This becomes especially important as the online grocery market is expected to grow handily over the coming decade. Figuring out delivery could be huge, as Nielsen expects online grocery shopping to be a $100 billion market. I'd expect this buyout to really bring to light just how great of an ecosystem Amazon is building, especially with Prime. Whole Foods will likely become somewhat of a membership retailer, like Costco (NASDAQ:COST), where Prime members get better pricing, possibly free grocery delivery, and the likes. Amazon is building an ecosystem that has the potential to be even greater, and reach further, than Apple's (NASDAQ:AAPL). And regardless of what Amazon is doing with its profit margins right now, it trades at 3.3x sales, with Apple at 3.5x.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.