Taking Stock

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SEC Filing Reveals Whole Foods’ Other Suitors; No Counter Offers Yet For 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 retailer 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 8.3 percent stake that activist investor Jana Partners had acquired in the retailer (just before presstime, it was revealed that Jana had sold its ownership in WFM for about $1.1 billion, earning a profit of nearly $300 million on a three-month investment in the retailer. Jana was the company’s second largest investor).

However, it wasn’t until April 17 that Whole Foods first contacted Amazon and the initial 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. And Amazon could almost immediately use Whole Foods’ units as mobile delivery sites, especially in densely populated areas where WFM has a concentration of stores such as New York, Philadelphia and Boston.

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. As I’ve said before, 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.

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.

On paper, the Amazon-Whole Food deal seems like a pretty clean one from an anti-competitive analysis (even though several shareholder lawsuits have already filed), and as such, I expect the FTC to approve the purchase, even if it takes as long as a year to finalize.

That will certainly give other merchants enough time 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.