Has The ‘Whole Foods + Amazon’ Hype Gone Too Far?

Aside from the machinations of Uber­—which we have covered at virtually every turn—headlines have been filled this week with fallout from Amazon’s $13.7 billion acquisition of Whole Foods Market. Coverage has included the 40% price cut on avocados, synergistic “Whole Foods + Amazon” signage, the Amazon logo sculpted into ground beef, and storefront displays of Echo and Echo Dot devices labeled “farm fresh!” near said avocados.

This is the bright new future of retail, didn’t you hear?

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When US regulators gave the OK last week, investors eagerly priced in the demise of publicly traded grocers like Kroger (NYSE: KR) and Supervalu (NYSE: SVU). How could these guys, still reeling from a recent bout of food price deflation, possibly compete with the beast Bezos built? The stocks of big box players got caught up in the selling, as well. And the performance of Blue Apron (NYSE: APRN) has been a disaster, with shares down nearly 50% from the meal-kit company's post-IPO high, driven heavily by fears of Amazon moving into the space.

Slowing down the hype train

So far, the widely publicized price cuts at Whole Foods are a little underwhelming. Analysts at RBC Capital Markets did a classic channel check at stores in New York and Austin, finding prices down roughly 24% in aggregate than before. Yet they are still about 6.6% higher than organic supermarket competitor Sprouts on average—only fresh baby kale was cheaper at Whole Foods, which is a bit of a letdown.

Moreover, items not on the Amazon price-cut press release—everything from butter to peanut butter and frozen pizzas—were largely unchanged. Gordon Haskett Research Advisors analyst Charles Grom declared, at least at this point, his "initial checks suggest that Amazon's bark may be greater than its bite."

Societe Generale's Omair Shariff deflates the hype with a two-pronged approach. For one, Amazon's Whole Foods price cuts merely bring key prices on items like chicken and beef closer to the national average as measured by the Bureau of Labor Statistics—that's not exactly precedent breaking. And two, Whole Foods' store footprint is relatively modest (about 1% US market share vs. 14.5% for Walmart).

This is all coming at a time of tepid retail sales growth, where consumers overall are showing an elevated price sensitivity in groceries. Credit Suisse analysts recently highlighted a persistent decline in sales for name brand food items versus cheaper private-label alternatives. This suggests a softening demand for the organic foods and premium meats that "Whole Paycheck" specializes in.

There are benefits to be had

Credit Suisse analyst Robert Moskow highlighted the likelihood of Whole Food's 365 private label showing up on Amazon's Prime Pantry, thus adding more pressure to big brands. And Amazon is attacking the two main barriers consumers have routinely noted as preventing them from shopping at Whole Foods: Prices (69% in 2017) and convenience (52%).

With an instant physical footprint, Amazon is also expanding the number of same-day pickup lockers.

Whole Foods + Amazon

Yet with competitors like Walmart ramping up its ecommerce presence and the likes of Kroger rolling out food delivery and drive-up services, the post tie-up doom and gloom—and resulting selling pressure—hitting grocery and retail stocks is a bit much. After all, some retailers have successfully battled back: Since the beginning of 2013, Best Buy (NYSE: BBY) shares are up 415% thanks in part to the implementation of an online price matching policy.

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Article by Anthony Mirhaydari, PitchBook