With the merger of Amazon.com, Inc. (NASDAQ:AMZN) and Whole Foods Market, Inc. (NASDAQ:WFM) now complete, let’s examine what kind of nifty synergies Amazon.com is going to create and how AMZN stock will benefit in the long term.
The first angle that I think Amazon is going to aim for is to engineer a turnaround of Whole Foods, but do so in a way that leverages its own massive infrastructure and ability to develop Whole Foods from an organics grocery store to a kind of Amazon satellite store.
With respect to the brand and its organic products, let’s recall that Whole Foods was once king of the hill with respect to organic foods. It was known as “Whole Paycheck” because it established price points that made it an upscale brand. If you wanted organics, you had to pay for it.
Whole Foods was originally the 800-pound gorilla in the organics space. The space was heavily fragmented and Whole Foods either rolled up the little guys or expanded its own stores. It effectively had no competition in the areas it operated in, because it only had a couple of hundred stores.
It made a solid profit, had great growth and cash flow, and expanded with no debt. Then other chains went public, like The Fresh Market, and a few hundred other stores were in the space, but not enough to really dent Whole Foods.
But then all the regular grocers started offering in-house organics. I didn’t think it would matter, but I was wrong. The competition really did hurt Whole Foods, and badly, as everyone got into the game. Organics have become a commodity in many ways. There is some price premium for them, but it’s not what it used to be.
Amazon can afford to drastically slice prices for organics, and get people back into the first-and-original name in organics. That’s because … Amazon doesn’t need to make a profit! We already know that’s how AMZN stock works. Shareholders don’t care about profits, and Amazon is a cash flow generator.
With this purchase, Amazon will benefit with about $800 million in additional annual free cash flow.
Not only that, Amazon could start leveraging its market power with suppliers for Whole Foods, forcing expenses down.
This also allows for Amazon to leverage its food delivery service and get those Whole Foods products delivered straight to people’s doors, which will elevate it beyond the competition. In addition, Amazon Lockers will have spaces in the stores.
But AMZN also has its Prime service, which can now be leveraged into a loyalty plan for Whole Foods. Right now, pretty much every grocery store has “loyalty plans” which really aren’t loyalty plans. It just means that you better have their loyalty card or you won’t get the posted discounts. Except everyone pretty much is a member of every grocery store, at least out here in Southern California, so it isn’t a loyalty plan so much as a pretend way to provide discounts.
Whole Foods didn’t have a loyalty program. With Prime, now it does. Prime members are supposed to get special savings and in-store benefits. With so many people now Amazon.com Prime members, that’s another reason to go to the stores. Go to the regular market and get the pretend discounts, or go to Amazon and perhaps get food that may be similar or close in price, and get perks for your Prime account.
What this all means is that people who downgraded and started buying regular grocery store organics may suddenly have reasons to return to Whole Foods. The store chains had seen seven straight quarters of same store sales declines. Amazon would not buy the company unless it had plans to turn that around.
I think this is going to be great for AMZN stock, and could change the retail world — yet again.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
