Cash flow is the lifeblood of Amazon.com (NASDAQ:AMZN). That’s unusual in the technology business. It is, however, common in the grocery business. Cash flow is why Amazon bought Whole Foods in 2017, for $13.4 billion. Since its purchase Whole Foods has been transformed into a price-cutting cash flow machine, prone to experimentation. Investors wonder what is going on. Well, Whole Foods is Amazon’s attempt to stimulate cash flow.
At the time of Amazon’s purchase, Whole Foods was a pricey option, located in high-income neighborhoods and often derided as “Whole Paycheck.” Kroger (NYSE:KR), more than five times bigger, then had a market cap of $25 billion. It opened April 3 with a market cap of under $19 billion, supporting revenue of $122 billion.
Public shareholders don’t understand cash flow, however. Thus, five of the seven grocers bigger than Whole Foods — Albertson’s, Ahold Delhaize, Publix, H.E. Butt and Wakefern — are privately held.
Cash flow is why Amazon was so cheap for so long. Amazon shares were worth just $300 as recently as 2013. They now trade at over $1,800. The question is, just what does Amazon have in store for Whole Foods.
Amazon’s Transformation of Whole Foods
Amazon spokesmen now like to say of Whole Foods that “no two stores are alike.” That’s certainly evident at two of its newest outlets, in Atlanta and Commack, on Long Island.
The Atlanta store, the company’s 500th, is 70,000 square feet, in an urban forest of skyscrapers, with a hamburger stand, and at least four places serving beer and wine. The Commack store has a suburban location and 45,000 square feet, with a large beauty section, coffee bar and a host of fresh food options like a bakery and butcher.
The pace of change, in a business where consistency is said to be key, can be dizzying. Whole Foods is discontinuing its low-cost 365 concept just weeks after opening such a store in suburban Decatur, Georgia, and closing a popular outlet near Emory University that’s a half-hour drive, and an entire world away from the new Midtown store.
That’s the price of change. Amazon wants to be No. 1, and it’s got deep enough pockets to fund its run.
Killing Kroger
Amazon can afford to lose money and experiment for the sake of cash flow. It had sales of $233 billion last year and generated $30.7 billion of positive cash flow from operations. Kroger, by contrast, had just $4 billion in operating cash flow on its $122 billion in sales. This is killing Kroger stock, despite KR stock’s dividend now yielding 2.35%.
Some say Whole Foods’ target is Walmart (NYSE:WMT), which is six times bigger than Whole Foods with 2018 grocery sales of $159 billion. It’s more accurate to say that Amazon’s target is its existing Prime customer base, over 100 million shoppers, who buy their online goods at Amazon but go elsewhere for offline shopping.
Thus, Whole Foods is doubling the number of deals it offers exclusively to Prime members, hoping to create synergy. It is also offering two-hour delivery of fresh foods in 60 markets, along with free pick-up. Amazon is also considering a second grocery chain, under the Amazon name, and expanding its line of Amazon-branded convenience stores, which have no cashiers.
The Bottom Line
Amazon is about growth and cash flow, not profit.
Amazon’s moves as a merchant contrasted with its online moves, where over half its sales are made by third parties, reducing its own inventory risks.
Groceries, especially fresh food and pre-made meals, carry enormous inventory risks. This is why most grocers are slow to change. Knowing that what you need is going to be in stock, and that your shopping list is going to be completed, is what gets people in the door.
In the name of growth, Amazon is now trying to change shopping habits, eliminating the weekly grocery run in favor of daily serendipity. It will need a much bigger footprint, in terms of stores, than the 500 Whole Foods units it has in order to accomplish this.
Amazon seems determined to build them.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
