Ocado shares race ahead as investors cheer prospect of Amazon deal

Tammy Harvey
June 20, 2017

June 19 Whole Foods Market Inc shares added to their gains on Monday after Amazon.com Inc announced plans last week to buy the upscale grocer, with investors betting that rivals could step in to create a bidding war.

"For starters, this acquisition promises to shake up pricing, the ecommerce space, the trajectory of retail automation in the United States, and the already considerable competitive pressures faced by existing food retailers", said Todd Maute, a Partner at the New York-based brand agency and retail environments consultancy.

Notably, shares of dozens of supermarkets, food producers, shopping malls and payment processors collectively lost about $35 billion in the USA market on Friday in response to the news.

It's also important to note that even if the deal goes through, the Amazon and Whole Foods combo will represent about 3.5% of grocery spending in the U.S. So it's not yet as groundbreaking as it sounds.

"Although industry revenue is only set to rise at an annualized rate of 0.8% over the five years to 2022, the transaction will allow the online retail giant to boost not only its grocery sales, but expand its brick-and-mortar presence", IBISWorld Industry Analyst Madeline Hurley said in a statement emailed to press. Amazon could provide the financial capital and tactical ability to build that into something big.

As sales declined at established locations, Whole Foods recently said it was hitting the brakes on expansion and that it no longer saw potential for 1,200 locations. Indeed, 76% of past four-week Whole Foods shoppers also shop Amazon.com. Investors looking into the crystal ball now see more and more of the home delivery or the pickup version of food swinging to Amazon more quickly than anyone thought it would before this deal.

Ladd, who left Amazon in March, said Amazon will seek to eliminate checkout lines by using technology that automatically scans goods as customers add them to their shopping carts.

Whole Foods shares rose as much as 2.2 percent on Monday - suggesting hopes the company might fetch a higher price - and were still up 1.3 percent at $43.25 in afternoon trading.

What do you think it will be like to walk into a Whole Foods 10 years from now?

Amazon, meanwhile, isn't "stupid enough" to change Whole Foods' brand, Mackey said at the town hall. Amazon may change the inventory at Whole Foods as part of broad effort to lower prices.

Amazon could try to cut operational costs at Whole Foods by using the same types of robots that already move inventory around at its e-commerce fulfillment centers. The company hasn't said whether that thinking changes under Amazon. At the margin, if this move makes the current USA branded food players more likely to sell out to Kraft-Heinz, or catalyzes a reduction in stock prices that makes Kraft-Heinz more willing to engage with them, then this could be a good signal for Kraft-Heinz's acquisition prospects overall. 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.

But now Mackey, 63, one of the most successful traditional retailers of the past generation, is going into business with Bezos, 53, the man most responsible for turning traditional retail on its head. They've tried AmazonFresh, Amazon Prime Pantry, and a bunch of other initiatives to get customers to order groceries online, but it's been slow going.

Fresh foods are the final frontier for Amazon.

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