On the day Amazon.com (NASDAQ:AMZN) announced it was acquiring Whole Foods Markets, grocery stocks across the board dramatically sold off. The prevailing thinking was that the combination of Amazon's logistical dominance and Whole Foods' brand cachet would be a truly disruptive force.
In the seven months since, what's happened is much less disruption, and much more continuation of the status quo.
It does appear there is now a focus on integrating the two brands, with two recent announcements speaking to that. Last month, it was reported that Amazon's VP of Amazon Prime will be spending more time with the Whole Foods division. Additionally, Amazon started a pilot two-hour grocery delivery program for Amazon Prime members in Austin, Cincinnati, Dallas, and Virginia Beach, later adding San Francisco to the mix.
Still, signs of growing pains have emerged for the newly combined entity. Ironically, the issues seem to revolve around logistics. What should investors make of these new growing pains?
Whole Foods has reportedly angered a powerful stakeholder
The newest concern for the Whole Foods division is increased tensions between the grocer and the important brands it stocks for shoppers. While many customers blamed Whole Foods' supplier problems on Amazon, issues had been simmering for a while. Employees and analysts blamed a new inventory management system -- order-to-shelf, or OTS -- that predated the acquisition.
OTS' aim was to nationalize the buying experience so the company could buy in bulk to take full advantage of volume and quantity discounts and avoid superfluous orders to limit spoilage costs. However, OTS had the downside of leading to stockouts and taking shelf space away from smaller regional and local suppliers that were often at the heart of Whole Foods' je ne sais quoi.
Although Amazon is a logistical powerhouse, something it has not had to deal with in recent years is strong supplier power. The company can dictate its terms to third-party sellers in its Amazon Marketplace. And critics have faulted Amazon for using its size and scale to force unfair terms on these smaller suppliers -- for example, Amazon recently announced a fee increase for third-party apparel sellers, which is noteworthy because the company now produces its own clothing.
The upshot here is that grocery is different due to increased supplier power, and therefore relationships must be handled more adroitly than Amazon is accustomed to. It is my opinion Whole Foods and Amazon will be able to quickly fix these relationships, however.
Acquisitions often take time
Acquisitions are hard. A study from auditing firm KPMG found 83% of all merger deals were failures, in the sense they did not boost shareholder returns. Amazon is no different in this regard; after paying $545 million in 2011 for Quidsi, the parent company of Diapers.com and Soap.com, the company shuttered the unit because it could not make a profit.
It is my opinion that the Whole Foods acquisition will be different, as the Whole Foods brand is far more valuable, and the positive synergies -- bringing a strong online grocery experience to market -- could be industry disruptive. However, in the short run expect continued growing pains from the Whole Foods division as it attempts to nationalize its buying experience and further integrates with Amazon.