With its $13.7B bid, Amazon agreed to pay a 27% premium over Whole Foods’ previous market valuation. This makes for a nice live case case in your strategy classroom. Was this a sound business decision? The market rewarded Amazon with an increase in its stock price. While some opportunities are apparent, it remains unclear exactly how Whole Foods will be worth 27% more to Amazon (and that’s just to break even). A five forces analysis will reveal that the grocery market is highly competitive with exceptionally thin margins — not an especially attractive industry to enter. So how can they win in this game? There are many possibilities that may come up in a discussion. For example, Amazon may:
- Build online grocery sales, a tiny but growing portion of the industry.
- Lower costs by applying automation technology and their supply chain expertise.
- Use customer data to build sales through Amazon or to sell some higher margin “impulse” items at Whole Foods.
- Leverage the market’s expectations that Amazon won’t pay dividends or post significant profit to lower prices and invest in the business.
Of course, these are highly speculative and carry significant risks. What is the likelihood that any of these will be achieved? Can Amazon manage change in such a large acquisition? Will other grocers make similar changes (or be bought out by tech companies with similar capabilities)? There is lots of fodder to discuss. Here is a packet of news articles that may be helpful. Also, I have prepared a spreadsheet to explore different scenarios for how this might play out where the starting point is Whole Foods’ recent financial performance (note that the decision tree requires the PrecisionTree Excel Add-in). Finally, here is a very brief poll to help assure that students come to class prepared and with an opinion on the deal.
Contributed by Russ Coff
Another question mark could be why Amazon – with a long standing proposition of mid/low prices – bought a premium-niche retailer.
Another angle would be to put this in the context of the forthcoming multi-country battle with Tencent’s ecosystem that includes JD.com, WeChat (Amazon has just announced a sort of similar concept) and others, with investors including big food giants such as New Hope.
The Chinese are coming and Tencent’s appears to be superior in many respect, including technology, and JD.com has been building in-house grocery capabilities – including, critically, fresh food – for around a couple of years whereas Amazon is lagging behind.
There are so many angles for discussion… one thing for sure is that it is far from granted that it is going to be a successful acquisition just because ‘it’s Amazon’.
Pingback: Does the Term “Core Competence” Destroy Value? | Carpenter Strategy Toolbox