Fool analysts Sean O'Reilly and Nathan Hamilton team up for an Industry Focus episode to discuss two recent announcements from Amazon. O'Reilly explains why he's so excited about an upcoming Priceline-style program for the online retail giant, and what ever became of Amazon's much-touted drone idea.
O'Reilly then discusses a surprising new venture for Coke. Always looking out for new niches, the soft drink company is partnering with a dairy co-op to introduce a whole new take on the humble gallon of milk.
A full transcript follows the video.
Nathan Hamilton: We're talking drones, deals, and milk on this edition of Industry Focus.
Welcome to the show, Fools. We are now the new Industry Focus, not Where the Money Is. We're doing a consumer goods edition today, joined by Sean O'Reilly.
Sean O'Reilly: Correct, and I'm really sad about the Where the Money Is thing. I'm kind of shedding a tear!
Hamilton: Yes, we had to lay it down and put it to rest.
O'Reilly: Oh, well. Out with the old, in with the new!
Hamilton: Yes. But we're still here, so that's what matters.
O'Reilly: We're still here, and that's what matters, yes.
Hamilton: Yes. There's a slew of deals that Amazon (NASDAQ:AMZN) is announcing. If we look at it in recent days, they mention 4K video. They've also got new deals on diapers and baby wipes. But there's news today that you think is perhaps more important.
O'Reilly: Not nearly as important as diapers, because I've got a 10-month-old son at home, so I've of course just ordered my Amazon brand diapers. I'll do a little product testing, maybe write an article about it.
Hamilton: They are cheaper.
O'Reilly: They are slightly cheaper. It's like a penny a diaper or something.
First and foremost -- and I love this deal -- Amazon came out and said they're basically going to have a "make an offer" program for products they act as an intermediary for.
They're not just talking about the diapers, or just a computer or something. We're talking about 150,000 products on Amazon.com that you can literally make an offer, type that offer in, and it'll go to the seller. This is awesome, because it brings a little bit of a haggling angle into it.
Hamilton: Like a Priceline (NASDAQ:BKNG) angle.
O'Reilly: Yes, it's a Priceline angle. I don't know if you've ever done that, but literally you get a bunch of offers for hotels. They don't tell you which hotel -- hopefully Amazon doesn't tell you what product you're buying ... But you basically send an offer and then if they accept it, great; if not no deal, and that's it.
This is awesome though, because one of Amazon's big revenue profit centers is just acting as an intermediary. We both know they take a big cut on all these little transactions. I experienced this firsthand when I sold a couple of textbooks on Amazon.com, back in my college days. They take a big cut, and if they can increase the number of transactions, just the volume of deals going on, that's kind of a big win, and that's basically what this will do.
Hamilton: Obviously this is a move to keep prices lower. Do you think Amazon is feeling the pressure from other retailers, or leading the way like they have been, to get the lowest prices?
O'Reilly: It's interesting you bring this up. There have been a number of consumer reports that have come out and more or less said that Amazon's not always the cheapest option for a lot of products.
You've got the convenience factor and the two-day shipping if you're a Prime member, but Amazon is not the be-all, end-all, cheapest prices out there. This is their effort to make a step in that direction.
Hamilton: There's other news, outside of prices, that may be related to Amazon. I know last week we talked about AI in the tech edition. Now we're looking at drones.
O'Reilly: Right. As we all know, if you were tuning into our last week's show, the end of the world's coming, thanks to AI! Skynet's coming.
Hamilton: Judgment Day!
O'Reilly: Judgment Day is coming, and one of the requirements for Judgment Day is the machines need to be able to move around, so drones are also a part of this. This is a big deal for the end of the world. We're all kidding! The end of the world's not imminent.
But for those of our listeners that do want to be able to order a five-pound or smaller package from Amazon and have it droned to your front door, you may have to wait a little bit longer. I'm very sad. I know you were really excited about it.
Hamilton: Yes. Is this different news than what Amazon announced previously? Amazon is, what, on their second or third iteration of these drones? I don't know the specific number, but this isn't something new for them. What's new at this point, that we know? Is the FAA changing any regulations?
O'Reilly: Yes. The FAA's basically just dragging their feet. This whole drone thing started with that interview with Jeff Bezos when he was like, "Oh yeah, we're trying drones," and everybody freaked out.
Then they actually put a name on it last December -- so a year now -- and they called it Amazon Prime Air, which is an awesome name.
The FAA has given approvals to six entities. Basically, there are six parties for commercial test flights of drones -- but it's like the University of Alaska, an international airport in the State of New York, the North Dakota Department of Commerce, I think Virginia Tech here in the State of Virginia has it; they've got a small airport.
Hamilton: Not delivering to Brooklyn.
O'Reilly: No, they're not delivering to Brooklyn, sorry!
The moral of the story is, it's clear that the FAA is kind of nervous about drones. Was it, they just had a drone problem with somebody flying something over JFK? So, they're obviously nervous about this.
What Amazon just came out with recently, this week, was they were like, "All right, if the FAA is going to drag their feet, we are going to go elsewhere." They already have a drone testing facility in the United Kingdom, in Cambridge, England, and they're just going to start doing drones in England. I don't know!
Hamilton: It's an interesting move, though.
O'Reilly: Yes, for sure.
Hamilton: If we take into account all of this news, Amazon moving on pricing, going across the pond for drones, maybe not willing to wait for the regulatory bodies in the U.S. to catch up. What does this all mean for investors? Is this more of a retail play? Is there competition there? Why is Amazon going this route?
O'Reilly: I'm currently not an Amazon shareholder, but if prices keep falling I might step up to the plate.
If I were an Amazon shareholder, I love the haggling "make an offer" thing, because that is Amazon's cash cow right now. The Prime, the video streaming, all that stuff; other than their cloud services, none of that stuff makes money. It breaks even at best. Acting as the intermediary and just increasing the volume of deals, that's awesome. I love that.
Hamilton: I guess we could look at it almost as similar to Uber.
Hamilton: They're the facilitator of the transaction.
O'Reilly: Yes, they're a middle man.
Hamilton: ... and maybe with little capital, sort of company that has higher returns.
O'Reilly: Absolutely, yes.
Hamilton: Maybe eventually, for Amazon.
Hamilton: Changing gears a little bit here ...
O'Reilly: Last but not least.
Hamilton: Yes. Coke (NYSE:KO). Normally we think, "Carbonated beverages, sugar" -- not modified milk, or engineered milk. Obviously there's something going on.
O'Reilly: Yes. Coke's next big thing is not a diet Coke, Coke Life, or whatever. All these executives down in Atlanta, Georgia at Coke headquarters are really excited about this deal they've got going to roll out a ridiculously expensive version of milk!
Hamilton: How much per gallon was it?
O'Reilly: They had an investor conference and Coca-Cola's Global Chief Customer Officer, Sandy Douglas, came out and said that it will be about twice the cost for your average gallon of milk, so $3.50-4.00 ... $7.00-8.00.
That being said, you might be getting your money's worth. This thing has a couple of big pluses. I'm going to set that up, but let me take a step back here.
They partnered with Fair Oak Farms to roll out Fair Life milk, and that's the brand that you'll see in your grocery stores here soon. Fair Oak Farms is not run by a mom & pop kind of deal, though. It is a cooperative comprised of 97 farms, and they produce 6.3 billion gallons of milk a year.
Hamilton: Engineered milk, or regular milk?
O'Reilly: That's regular milk. They need the regular milk to make the engineered milk. That's a lot of milk!
Hamilton: What is this? Is it fortified milk of some sort?
O'Reilly: Yes. They've got the special process to basically infuse ... it has 50% more protein and calcium than normal milk; the process is currently patented. It has half the sugars of your normal 2% milk in the grocery store, and it is lactose free, for all the lactose intolerant people in the audience.
Hamilton: And good for the osteoporosis crowd as well.
O'Reilly: Absolutely, yes.
The other thing that I read -- and this was reviewed in an awesome article by one of our Fool.com contributors, Asit Sharma; he wrote about this. They did product testing, where they bring in a bunch of consumers and they just have them taste the milk, and everybody just raves about the taste and the flavoring and everything. Everybody really likes it. This has all these Coke executives really, really excited.
You know how we heard it was a big deal that Diet Coke passed Pepsi (NASDAQ:PEP) as the number two brand in the United States? One day it might be milk, I don't know!
Hamilton: Should shareholders look into it too much? You mentioned it's a pretty small co-op. We know companies such as Pepsi and Coke are moving beyond sugary drinks or carbonated beverages. Is this just another niche for it to get into?
O'Reilly: They make so much stinking money every year globally -- Coke is a global company -- their goal for Fair Life milk, and shareholders should take this to heart; their goal is to make it something like their Simply Orange juice. They own Simply Orange in your grocery store. It's a good brand, it tastes good, but it's not the cash cow that is Coca-Cola Classic.
Hamilton: Not the curved bottle.
O'Reilly: No, sorry!
Hamilton: Maybe a curved milk bottle.
O'Reilly: Yes! But it is nice to see that they're being innovative, investing in the future, da-da-da-da-da.
Hamilton: Great. Thanks for bringing our listeners up to speed this week.
Hamilton: Thanks for listening, Fools.
O'Reilly: Take care.
Nathan Hamilton owns shares of Amazon.com and Google (A shares). Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Coca-Cola, Google (A shares), Google (C shares), PepsiCo, and Priceline Group. The Motley Fool owns shares of Amazon.com, Google (A shares), Google (C shares), PepsiCo, and Priceline Group and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.