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Why Amazon Is Going Brick And Mortar

|Includes: AMZN,, Inc. (AMZN), GOOG, KR, RAD, SVU

Amazon's (NASDAQ: AMZN) $13.70 billion purchase of Whole Foods Market (NASDAQ: WFM) might be the beginning of a brick and mortar buying spree by Jeff Bezos.

There are several good reasons for Bezos to go shopping for brick and mortar acquisitions. These reasons include:

1. Brick and mortar is very cheap right now; Kroger (NYSE: KR) just picked up 16 Marsh supermarkets in Indiana for just $16 million. That price included a choice downtown location in Indianapolis. SUPERVALU (NYSE: SVU); a grocer that reported $14.97 billion in revenues on February 28, 2017, had a market capitalization of $1.08 billion on June 12, 2017. Rite Aid (NYSE: RAD) (the nation's third largest drugstore with 4,553 locations); reported revenues of $32.85 billion on February 28, 2017, and a market capitalization of $3.161 billion on June 16, 2017.

2. Amazon needs to reduce delivery costs. Much of its profit margin is going straight to delivery companies like UPS (NYSE: UPS) and FedEx (NYSE: FDX). One way to do this is to operate brick and mortar locations where customers can pick up merchandise and drop off returns. Another is to tap solutions like Uber, Lyft and Deliv or create a delivery app to reduce costs.

3. The Everything Store wants to expand its grocery business. Purchasing supermarkets would give it neighborhood fulfillment with refrigerators and shelves. These can double as pickup and drop-off points for merchandise and generate additional revenue through traditional retail sales.

4. Going brick and mortar will enable Amazon to accept cash payments for merchandise ordered online. Cash is still a huge part of the economy; 32% of all transactions and more than 50% of all purchases in the United States in 2015 were made with paper money, the Federal Reserve Bank of San Francisco reported. Walmart is already accepting cash payments for online orders at its stores.

5. Amazon needs to fend off aggressive challenges from Walmart (NYSE: WMT), Kroger, Alphabet's (NASDAQ: GOOG) Google Express, Target (NYSE: TGT) and others. Alphabet (NASDAQ: GOOGL) Kroger and Walmart actually seem to be ahead of Amazon in critical areas like same-day delivery and "click and pull (online orders picked up at a store)." Amazon needs to play catch up in this area fast.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.