Taking Stock

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Whole Foods Had Other Suitors, But Don’t Expect Anyone To Top Amazon’s $13.7B Bid

While it’s doubtful to this reporter that anybody will make a serious counter offer to top Amazon’s $13.7 billion all-cash bid to acquire Whole Foods, the large organics retailers did generate a modest level of interest in the months leading up to the announcement of the tentative agreement.

According to an SEC filing earlier this month by the Austin, TX-based merchant, six interested parties contacted WFM to inquire about a sale, merger or an enhanced relationship. Four of those inquiries came from private equity firms. During this period Whole Foods was also in the process of revamping its board and reacting to the aggressive 9 percent stake that activist investor Jana Partners had acquired.

It wasn’t until April 17 that Whole Foods first contacted Amazon and the first exploratory meeting took place on April 30 in Seattle. On May 21, Amazon made its first offer – $41 per share in cash. Whole Foods countered at $45 per share, but according to the filing Amazon was not interested in a long, drawn out cat-and-mouse bidding process. The Seattle-based juggernaut upped its bid by only $1 per share and emphasized that it was the company’s best and final offer.

Apparently WFM CEO John Mackey had already “fallen in love” with Amazon and recommended to the company’s board of directors that they accept the $42 per share deal which was ultimately announced on June 16.

Since then, there has been a ton of industry speculation about how Amazon will reshape the entire grocery industry (premature) and what tangible effect the clout of the enterprise and the talent of its people will have on improving Whole Foods.

If approved, there are some relatively quick benefits that Amazon’s deep distribution network can bring to its table.

Think of the possibility of shipping a case of “365” brand product from an Amazon fulfillment center to a residence that isn’t close to an existing Whole Foods store. Even more basic would be Amazon’s ability to utilize WFM’s existing units as in-house distribution centers for local deliveries (especially in concentrated markets like Washington DC, New York and Boston.

Of course, if I ran Instacart, Whole Food’s same-day delivery provider, or UNFI, the retailer’s long-time primary grocery supplier, I’d be plenty worried. One could easily visualize those services being handled directly by Amazon, whose core business is essentially rapid distribution. I’m not so bullish on whether the magic of Amazon CEO Jeff Bezos will have a major impact on what goes on inside the four walls of WFM’s more than 450 stores. The bricks and mortar grocery business will remain a low margin industry because of its heavy reliance on labor and capital as well as having to account for shrink. That formula applies to discounters as diverse as Aldi and Costco and upscale operators like Whole Foods, Wegmans and even the most specialized of merchants such as Dean & Deluca and Eataly. As brilliant as Bezos is and as innovative as Amazon has demonstrated itself to be throughout its 23-year history, there’s no penicillin available to significantly improve margins when operating grocery stores of any type.

Of the many reports I’ve read, perhaps one of the strangest was a CNBC story that somehow opined that Amazon’s broadened presence in the grocery industry will ultimately lead to the death of the traditional coupon business. The story notes that Amazon’s ongoing low-price strategy will become part of WFM’s pricing model (really?), subsequently forcing virtually the entire retail grocery industry into an EDLP frenzy, eliminating the advantage that coupons offer. While the traditional print coupon business has certainly declined over the past decade, it is nowhere close to death and to posit that “whole paycheck” is somehow going to morph into “whole discount” is an absurd theory or perhaps even “fake news.”

There’s no question that traditional retailers are going to have to continue to adapt to fill the needs of emerging Millennial and Gen-Y shoppers. Amazon’s increased presence in the grocery arena will serve to prioritize and accelerate those efforts.

To that point, of the many Amazon-Whole Foods stories that I’ve read over the past month, one of the best the best came from Ken Cassar, an analyst from Slice Intelligence (intelligence. slice.com), an organization that measures digital commerce activity and customer loyalty. In an essay titled “Brick-And-Mortar Grocers Must Reinvent Or Die,” Cassar asserts, “From this day forward, brick-and-mortar grocers can no longer think about themselves as brick-and-mortar grocers. They must look at their stores as an asset, but their stores can no longer define them. They need to rethink their businesses from the consumer outward, but they need to begin to lead the consumer, rather than react to her. Most Americans do not buy groceries online – it is incumbent upon grocers to take consumers on a path towards doing so before Amazon does.”

He continued, “1. Every store must have a drive-through pick-up staffed with knowledgeable employees. 2. Grocers need to quickly develop the ability to precisely know what is in stock in every store in real time. 3. Grocers have to become experts in all forms of digital user interface, from Web sites to mobile apps to voice ordering to IoT (Internet of Things) commerce. 4. The grocery CTO (Chief Technology Officer) just became the most important employee at every grocery chain in America. Retailers that laugh off the impact of Amazon’s acquisition of Whole Foods will simply not exist 5-10 years from now.

“For brands, this acquisition needs to be viewed as an opportunity they have no choice but to seize. Every grocery chain in America is going to need to begin a process of deep collaboration with their brand partners to reinvent grocery shopping.

“The opportunities vary by category and by retailer. Brands need to help retailers redefine themselves in a way that is in tune with their markets and customers rather than collaborating to clone Amazon.

“Amazon’s biggest weakness is its own self-confidence. It has historically been uninterested in insights and ideas from its brand partners. Traditional grocers, though, have historically been highly dependent upon insights and ideas from brands. It is imperative that brands up their digital IQ in order to be the partners that grocers need right now.”

Although on paper the Amazon-Whole Food deal seems like a pretty clean one from an anti-competitive analysis, I still expect the FTC to need 8-12 months to review and likely approve this acquisition.

That’s how much time other merchants will have to prepare their defenses to compete against potentially the largest game changer since Wal-Mart began to expand nationally with its SuperCenter model in the late 1980s.