No More Whole Paychecks, Amazon Promises
(Bloomberg) -- Hi, all. It’s Eric. Whole Foods except cheaper. What’s not to love?
Amazon nailed its press release on the imminent closing of its $13.7 billion acquisition of the organic grocery chain Whole Foods. “Whole Foods Market will offer lower prices starting Monday on a selection of best-selling grocery staples across its stores, with more to come,” the release says.
One tweeter quipped, “Thanks to Amazon, avocado-loving millennials can now afford houses.”
It’s hard to imagine a more pitch-perfect branding exercise. Combine Whole Foods’s reputation for high-quality groceries and Amazon’s “customer obsession,” and you’ve got the best of both worlds. Another tweet that captured the moment: “me: monopolies are bad, amazon is evil / also me: tell me more about how this deal will save me money at Whole Foods”
Of course, absent from the press release: a full explanation of how Amazon would find the savings anytime soon. There were hints as to how Whole Foods’ new owner will try to squeeze new revenue and savings over time. Amazon Prime will become the customer-rewards program for Whole Foods, driving more shoppers to the web retailer’s lucrative annual subscription. The e-commerce giant plans to integrate the two companies’ point-of-sale systems and logistics networks, potentially driving down costs. It’s hard to imagine either of those will have a meaningful immediate impact. Probably most importantly, Amazon will sell Whole Foods’ store brands online.
Still, it’s not as if Whole Foods was charging more for organic responsibly farmed salmon or organic baby kale because it hadn’t considered that maybe customers would prefer to pay less.
The Austin, Texas-based company had been trying to defend against a falling stock price. Before the acquisition Whole Foods’s stock had sunk to a nadir, dropping from a peak of $65.24 in October 2013 to a low of $27.96 three years later. (Amazon is paying $42 a share.)
Amazon’s stock fell less than 1 percent on the day of the price-cut announcement Thursday. A blip. The grocery chain Kroger’s stock, however, fell about 8 percent after Amazon announced the acquisition would close this coming Monday. The news erased almost $12 billion in value from grocery stocks.
My colleague Shira Ovide made the smart point that maybe Amazon doesn’t have to find a way to make up for the price cuts. Amazon has grown accustomed to a lower operating margin than Whole Foods. Amazon’s strategy revolves around driving prices lower and operating with razor-thin margins. And that’s not exactly a novel idea in the grocery business.
The point I’m building to here is that there’s a long road ahead for Amazon to justify its largest acquisition ever. Saying you are lowering prices is going to win over consumers, but it doesn’t mean that it makes sense for Amazon’s value to shareholders. That will require stellar execution.
Some were just dumb ideas, but many others made sense at the time only to fail in execution. And most of those mergers at least involved two technology companies. Amazon bought a grocery store! I refuse to bet against Jeff Bezos. But we’ll need to see how well Amazon does operating stores that try to make money selling chicken before, well, we start counting our chickens.
And here’s what you need to know in global tech
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