The business world is buzzing over Amazon’s $13.7 billion purchase of Whole Foods. CTH has received requests for opinion. Amazon stockholders may not like the perspective.
(Via CNN Money) The online retail giant announced Friday that is buying organic grocery chain Whole Foods (WFM) for $13.7 billion in cash. The deal values Whole Foods at $42 a share, 27% higher than where the stock was trading Thursday.
Amazon (AMZN, Tech30) said Whole Foods stores will continue operating under that name as a separate unit of the company. Whole Foods CEO John Mackey will stay on to lead Whole Foods, which will keep its headquarters in Austin, Texas. (link)
Here’s my review. Firstly, Whole Foods was available for purchase because Whole Foods business model was limited; and like the progressively minded organization they are – they allowed their Birkenstocks to travel beyond their limits, which always leads to failure.
In the PC corporate world ‘pending failures’ are called “challenges“, or “opportunities” if you don’t want to get kicked out of the boardroom.
The cost of organic products, in combination with their fundamental flaw (Achilles heel) that economies of scale (warehouse and distribution) are a prerequisite within the low margin industry for cost savings, kept their prices high.
As a regional business, inside specific markets with specific access to locally sourced product, Whole Foods would be ok. It’s their core operations and reason for their initial success.
However, attempt to expand that operational model nationally (which they did), and you enter a dynamic of trying to sell products in markets that don’t appreciate or value the Vichy experience of dropping $300 for two Eco-friendly canvas bags of fruits, vegetables and oddly pronounced olive oils.
High prices are necessarily part of the Whole Foods overall business model. Expand operations beyond niche markets that can afford such prices and, well, failure (ie. their Birkenstocks traveled to far). That position is exactly where they were.
♦ Enter Jeff Bezos, Amazon and a distribution network with a high-minded belief their distribution can/will enhance the logistic and efficiency challenges encumbering Whole Foods future success.
No doubt Bezo’s gender neutral Latte bean counters found some like-minded suave millennials, complete with man-buns and algae cakes, to deliver a fabulous Apple-powered presentation therein. Business graveyards are filled with such enamored and well-meaning carcases.
Whole Foods operates approximately 460 stores. [How many of them actually turn a profit, and hold up the loss leader footprint, is unknown.] Amazon reportedly paid $13.7 billion (yes that’s billion with a “B”) for the footprint. Or approximately $29.8 million per retail unit.
$29.8 million per store is approximately $10 million more (per unit) than anyone with a modicum of practical common sense would normally pay. Then again, Amazon is cash heavy, so what’s a few billion amid like-minded latte power-point-pals; and Mackay’s crew of fellow travelers know how to burn cash better than most. (See Hillary Clinton’s 2016 boondoggle expenditure for reference.)
However, in Bezo’s world, amid the giddy financial generation, money seems to grow on trust-fund trees. The bottom line of actual profit is transparently non-existent in this $13.7 billion expenditure. Even with a modicum of success, it would take a generation of successful operations for all 460 units to pay back such an over inflated purchase price. So, obviously this is not a decision based on bottom line profit generation for the parent company Amazon.
That brings us to the next set of points which lean more remarkably toward failure.
Technology, and more specifically technological mobility, is now creating individual efficiencies in consumer personalization to exceed any investment value that a retailer would necessarily place in infrastructure.
Does that sound like corporate gobbledyspeak? Good, it was supposed to.
Plain english version – People are assuming Amazon will be looking to generate shop-at-home (direct delivery) value via a synergy of Whole Foods grocery operations and Amazon’s exhaustive distribution network. [All of the highfaluting Brioni suit and disposable tailored white shirt crews are espousing that opinion.] Amazon is anticipated to be able to deliver groceries through this acquisition.
In order for that to be a possible future outcome, layers of cost efficiency would need to be the driver of Whole Foods boardroom discussion very soon. Very unlikely. Apparently unbeknownst to the algae-cake community, the overall industry, as a direct result of the technological mobility of the consumer, is now less invested in such an approach.
Simple. Technology is also creating efficiency for consumerism. It is entirely possible to go on-line for your grocery purchase, submit your grocery list to your local market, and then utilize Über transport as the pick-up and delivery method. Über and Lyft won’t be just for taxi service anymore…. watch/wait for it.
The all encompassing process of ‘field-to-fork’ within the food industry is poised to break down into various competing sub-sets and sub business units, external to the food retailer. Again, efficiency of scale and specialization is essentially the driver (no pun intended).
On the upside of angled considerations for Amazon, they are also looking into entry in the retail store market, and with that in mind actual foot traffic is a prime factor. No industry drives a higher measure of consistent foot traffic than your local supermarket. So there can be a reasonable expectation that Amazon stores will have some connective tissue to the locale of Whole Foods. [Somewhat guessing here]
However, in the direct-to-home market for grocery operations, specifically because of the aforementioned mobile distribution specialization, the synergy of Whole Foods and Amazon shouldn’t be predicated on a belief such a new market will necessarily emerge.
Yes, the upper-east side, and those of similar refinement, may welcome Amazon delivery of Whole Foods products. But that doesn’t change the issues of regional limits for such consumer evaluations. The baseline Achilles heel of Whole Foods still exists, albeit with a possible delivery service.
Tear it all apart and Amazon just paid about $30 million per store for a business enterprise worth about 30% less than that. There is no reasonable way, from a profit perspective, for Amazon to ever recapture such an expenditure. Then again, as stated, it doesn’t look like profit is their motive.
That said, as history customarily shows, sooner or later the value of a common stock will not support the best intentions of well worn Birkenstocks.