If you are a shareholder in either Amazon (AMZN) or Whole Foods Market (WFM), their combination ought to please you.
Both stocks rose on the merger news while the rest of the grocery industry dropped. But in the long run, I’m not sure their deal will work out well for any of us.
Here’s why.
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Whole Foods Won’t Become Logistic Hub
No one outside Amazon (and possibly within it) really knows what Jeff Bezos plans for Whole Foods.
We do know he’s been trying to break into groceries for years. We also know he sometimes acquires companies and then leaves them mostly alone. Amazon bought Zappos in 2009, but today it’s still Zappos.
Much of the Whole Foods analysis revolves around Amazon’s using the stores as a kind of delivery hub or pick-up zone. I don’t think that will happen.
First, the stores don’t have much extra space. They can be grocery stores or warehouses but not both. Second, Whole Foods stores are usually in high-end shopping centers. Amazon could probably find lower-rent space not too far away if it wanted logistics hubs.
So, I think Whole Foods stores will still be grocery stores. But they will change.
High Tech Meets Whole Foods
They’ll get new technology. Amazon Go could be the model: a grocery store with no check-out. You get an app that tracks you through the store, identifies whatever you pick up, and charges you for it.
That would work pretty well at Whole Foods—they’re already halfway there.
Consider the price labels on their shelves. Instead of paper tags, most Whole Food products have these little digital devices. Presumably they’re networked and a central office can change them instantly.
We also know that Amazon—the online part of it—uses dynamic pricing that can change frequently. Whole Foods is already set up to do the same in its physical stores. You can bet Jeff Bezos noticed.
The genius of Amazon Prime is that the free shipping reduces your price sensitivity. They don’t force Prime on you, but they don’t need to. Many folks search for what they want and filter by the items that are Prime eligible, then choose.
They never know whether a less expensive non-Prime option is available.
I suspect Whole Foods under Amazon will become a more sophisticated version of what it is now: a premium-price grocery store catering to well-off people. They’ll either dash in to grab what they want or have it delivered. In either case, this service will further insulate the Protected class from once-common experiences.
Investment Implications
The process has been underway for some time.
About a year ago, my colleague Robert Ross and I started seeing trading opportunities in the low-end retailers and dollar stores. Another one popped up on our screens after the Amazon-Whole Foods announcement sent grocery stocks down.
As John Mauldin keeps saying, we’re overdue for recession. I agree, and I think it makes sense to own stocks that tend to do well in times of economic weakness. The dollar stores are tailor-made for that. But others see the opportunity, too.
Aldi and Lidl are European grocery chains with big plans to expand in the US. I’ve never lived where they had stores, so I have no personal knowledge; but Robert has, and he describes Aldi as “Dollar General with produce and meat.” The atmosphere is spartan, but the prices are apparently low.
See where this is going?
One of the fascinations of economics is the way market forces nudge people and businesses in new directions. Unraveling cause and effect can be tough, but things don’t happen randomly. Every trend is really a long chain of actions and reactions.
The Protected class’s increasing separation from mainstream society is a trend that we increasingly see reflected in retailing. Stores that cater to either the top or bottom extremes—luxury retailers and dollar stores—are doing well. Those that cater to the middle are struggling.
Now, that trend is reaching the grocery segment.
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