Amazon.com (AMZN 0.98%) just got the go-ahead to close its $13.7 billion buyout of Whole Foods Market (WFM +0.00%). Wasting no time at all, the merger is now scheduled for Monday, Aug. 28.
Let me walk you through what that means to shoppers and investors.
Image source: Getty Images.
What's new?
The companies originally expected to close their merger in the second half of 2017. Whole Foods shareholders approved the deal in a vote this Wednesday, hours after the Federal Trade Commission's decision to end its review of the deal's potential anticompetitive business effects. The end markets for Amazon and Whole Foods don't overlap much today, despite Amazon's best efforts to break into the groceries market, so the regulators found no reason to object.
And the very next day, the two companies announced their final nuptials. Whole Foods investors will get their cash payouts deposited in their brokerage accounts on Monday, $42 per share. If you want to become an Amazon shareholder as part of this deal, there's nothing stopping you from buying Amazon stock with this cash. There just won't be any automatic stock-for-stock swaps in this all-cash deal.
Amazon will start to distribute Whole Foods' store-brand products across its online food shopping portals, while some Whole Foods stores will add Amazon Lockers for local pick-up of some Amazon orders. Whole Foods will also replace its customer rewards program with Amazon Prime in the near future, including special discounts for Prime members who shop in Whole Foods stores.
But above all, Amazon promised to lower prices on many food items at Whole Foods, starting on Monday. And that's "just the beginning," according to press materials. Whole Foods under Amazon's management will continue to sell the same natural and organic foods as before, but at lower prices over time. Amazon's superior logistics and marketing tools will contribute to these savings.
What about Whole Foods' profit margin?
On top of increased process efficiencies, Whole Foods has room to slim down its profit margin and still make sense as a profitable business.
Profit margins are famously slender in the retail sector as a whole, and even more so among grocery stores. But Whole Foods has more room for belt-tightening than most, because it is a market leader today:
|
Grocery Retailer |
Operating Margin (TTM) |
Free Cash Flow Margin (TTM) |
|---|---|---|
|
Whole Foods |
4.3% |
5.9% |
|
Wal-Mart Stores (WMT 1.72%) |
4.7% |
4.2% |
|
Costco Wholesale (COST 0.73%) |
3.1% |
1.7% |
|
Kroger (KR 1.58%) |
2.4% |
0.9% |
Data source: Morningstar. TTM = trailing 12 months.
Whole Foods' focus on organic, free-range, natural, and otherwise premium foods gives the company lots of leeway to set high item prices. Even if the new Amazon-inspired discounts cut Whole Foods' cash profits in half, it would still be among the most efficient cash machines in the supermarket sector.
The discounts will also start out with just a few hand-picked items rather than a blanket coupon for the entire Whole Foods experience. The press release mentioned best-sellers such as organic bananas, large brown eggs, and lean ground beef -- crowd-pleasing attention magnets that will bring discount-savvy shoppers into the store. Standard operating procedure at that point will put plenty of higher-margin goods near these discounted items.
So yeah, Whole Foods shoppers are about to get a significant helping of in-store discounts on Monday. Later on, prices should drift lower overall and the Amazon Prime loyalty program also kicks in later.
None of these moves will destroy the business value of Amazon's new asset. Together, Whole Foods and Amazon could scoop out a hefty portion of the highly fragmented trillion-dollar market for grocery sales. That's a serious business prospect, even if it takes many years to materialize.
