Is Wal-Mart Prepared To Face The Amazon - Whole Foods Combination?

Violet Tucker
June 20, 2017

Analysts are turning on Costco (NASDAQ:COST), concerned that the longtime market darling is finally vulnerable following Amazon.com's (NASDAQ:AMZN) news-rattling announcement, late last week, that it would be acquiring Whole Foods Market (NASDAQ:WFM) in a $13.7 billion all-cash deal.

It's unclear and seems unlikely Amazon's acquisition had much to do with the decision by Whole Foods since the deal is still pending regulatory approvals, but it wouldn't be necessarily surprising either following Amazon's decision to remove its other apps from the platform.

Those of us in the industry have known for a while that Whole Foods has been pressured to sell by its activist investor Jana Partners and mutual-fund manager Neuberger Berman, and rumors of potential deals with everyone from Kroger to Albertsons have been bandied about. Meanwhile, the more than 460 Whole Foods stores in the U.S., Canada and the United Kingdom could be turned into distribution hubs - not just for delivering groceries but as pickup centers for online orders.

For starters, the tie-up between Amazon and Whole Foods will likely hurt local grocery stores, Rep. Ro Khanna (D-Calif.) told CNBC Monday morning.

Increasingly, Lipman added, Amazon's private-label initiatives are giving it the ability to either participate in or actually dominate various retailing categories.

"Amazon will reduce prices and change the assortment of products carried in Whole Foods stores to attract a larger customer base", said Ladd. Jana Partners now owns 9 percent of Whole Foods Market.

So why would anyone assume Amazon's acquisition of Whole Foods would face regulatory scrutiny?

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The Amazon-Whole Foods transaction is expected to close in the second half of 2017 following regulatory approvals and a vote by Whole Foods shareholders. In preparation for the grocery price war, Wal-Mart in recent months has cut grocery prices, improved fresh food and meat offerings, modernized shelving and lighting in its grocery aisles, and expanded its online grocery pickup service. Though it's not yet clear whether Whole Foods will continue to operate with its current strategy but it is likely as Mackey will continue to operate as CEO.

According to the senior food retailing analyst at CFRA, Joe Agnese, "Once Amazon is a player in the industry, anything can go", and "The big threat is what else they can do".

She conceded it might be tough to outbid Amazon, but it could still be worth it to drive up the price and make Amazon pay more.

City fears that Amazon's huge takeover of Whole Foods could affect the online giant's existing deal with supermarket Morrisons appeared unfounded today. That's business that comes right out of traditional grocery retailers. Michael Pachter, managing director at Wedbush Securities, says this purchase will bring Amazon into many more American homes in an unprecedented way. The grocery business is among the most pedestrian of retail endeavors, and what little profit there is depends largely on fobbing off a lot of the work onto customers. In some locales, it even served as the post office too - it's nearly like a template for the virtual general store Amazon has become.

Even as analysts are working overtime analyzing the implications of Amazon.com, Inc.

Parikh added that Amazon's offer appears to be "undervaluing the company's prospects and the powerful brand" and that Whole Foods could do better.

Other reports by Guamnewswatch

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