Whole Foods Had Other Suitors, But Don’t Expect Anyone To Top Amazon’s $13.7B Bid
While it’s doubtful to this reporter that anybody will make a serious counter offer to top Amazon’s $13.7 billion all-cash bid to acquire Whole Foods, the large organics retailers did generate a modest level of interest in the months leading up to the announcement of the tentative agreement.
According to an SEC filing earlier this month by the Austin, TX-based merchant, six interested parties contacted WFM to inquire about a sale, merger or an enhanced relationship. Four of those inquiries came from private equity firms. During this period Whole Foods was also in the process of revamping its board and reacting to the aggressive 9 percent stake that activist investor Jana Partners had acquired.
It wasn’t until April 17 that Whole Foods first contacted Amazon and the first exploratory meeting took place on April 30 in Seattle. On May 21, Amazon made its first offer – $41 per share in cash. Whole Foods countered at $45 per share, but according to the filing Amazon was not interested in a long, drawn out cat-and-mouse bidding process. The Seattle-based juggernaut upped its bid by only $1 per share and emphasized that it was the company’s best and final offer.
Apparently WFM CEO John Mackey had already “fallen in love” with Amazon and recommended to the company’s board of directors that they accept the $42 per share deal which was ultimately announced on June 16.
Since then, there has been a ton of industry speculation about how Amazon will reshape the entire grocery industry (premature) and what tangible effect the clout of the enterprise and the talent of its people will have on improving Whole Foods.
If approved, there are some relatively quick benefits that Amazon’s deep distribution network can bring to its table.
Think of the possibility of shipping a case of “365” brand product from an Amazon fulfillment center to a residence that isn’t close to an existing Whole Foods store. Even more basic would be Amazon’s ability to utilize WFM’s existing units as in-house distribution centers for local deliveries (especially in concentrated markets like Washington DC, New York and Boston.
Of course, if I ran Instacart, Whole Food’s same-day delivery provider, or UNFI, the retailer’s long-time primary grocery supplier, I’d be plenty worried. One could easily visualize those services being handled directly by Amazon, whose core business is essentially rapid distribution. I’m not so bullish on whether the magic of Amazon CEO Jeff Bezos will have a major impact on what goes on inside the four walls of WFM’s more than 450 stores. The bricks and mortar grocery business will remain a low margin industry because of its heavy reliance on labor and capital as well as having to account for shrink. That formula applies to discounters as diverse as Aldi and Costco and upscale operators like Whole Foods, Wegmans and even the most specialized of merchants such as Dean & Deluca and Eataly. As brilliant as Bezos is and as innovative as Amazon has demonstrated itself to be throughout its 23-year history, there’s no penicillin available to significantly improve margins when operating grocery stores of any type.
Of the many reports I’ve read, perhaps one of the strangest was a CNBC story that somehow opined that Amazon’s broadened presence in the grocery industry will ultimately lead to the death of the traditional coupon business. The story notes that Amazon’s ongoing low-price strategy will become part of WFM’s pricing model (really?), subsequently forcing virtually the entire retail grocery industry into an EDLP frenzy, eliminating the advantage that coupons offer. While the traditional print coupon business has certainly declined over the past decade, it is nowhere close to death and to posit that “whole paycheck” is somehow going to morph into “whole discount” is an absurd theory or perhaps even “fake news.”
There’s no question that traditional retailers are going to have to continue to adapt to fill the needs of emerging Millennial and Gen-Y shoppers. Amazon’s increased presence in the grocery arena will serve to prioritize and accelerate those efforts.
To that point, of the many Amazon-Whole Foods stories that I’ve read over the past month, one of the best the best came from Ken Cassar, an analyst from Slice Intelligence (intelligence. slice.com), an organization that measures digital commerce activity and customer loyalty. In an essay titled “Brick-And-Mortar Grocers Must Reinvent Or Die,” Cassar asserts, “From this day forward, brick-and-mortar grocers can no longer think about themselves as brick-and-mortar grocers. They must look at their stores as an asset, but their stores can no longer define them. They need to rethink their businesses from the consumer outward, but they need to begin to lead the consumer, rather than react to her. Most Americans do not buy groceries online – it is incumbent upon grocers to take consumers on a path towards doing so before Amazon does.”
He continued, “1. Every store must have a drive-through pick-up staffed with knowledgeable employees. 2. Grocers need to quickly develop the ability to precisely know what is in stock in every store in real time. 3. Grocers have to become experts in all forms of digital user interface, from Web sites to mobile apps to voice ordering to IoT (Internet of Things) commerce. 4. The grocery CTO (Chief Technology Officer) just became the most important employee at every grocery chain in America. Retailers that laugh off the impact of Amazon’s acquisition of Whole Foods will simply not exist 5-10 years from now.
“For brands, this acquisition needs to be viewed as an opportunity they have no choice but to seize. Every grocery chain in America is going to need to begin a process of deep collaboration with their brand partners to reinvent grocery shopping.
“The opportunities vary by category and by retailer. Brands need to help retailers redefine themselves in a way that is in tune with their markets and customers rather than collaborating to clone Amazon.
“Amazon’s biggest weakness is its own self-confidence. It has historically been uninterested in insights and ideas from its brand partners. Traditional grocers, though, have historically been highly dependent upon insights and ideas from brands. It is imperative that brands up their digital IQ in order to be the partners that grocers need right now.”
Although on paper the Amazon-Whole Food deal seems like a pretty clean one from an anti-competitive analysis, I still expect the FTC to need 8-12 months to review and likely approve this acquisition.
That’s how much time other merchants will have to prepare their defenses to compete against potentially the largest game changer since Wal-Mart began to expand nationally with its SuperCenter model in the late 1980s.
‘Round The Trade
And while we’re still traveling in the digital world, according to the Wall Street Journal and confirmed by my sources, Albertsons is expected to revamp many of its e-commerce systems which will impact its more than 2,300 supermarkets. The Boise, ID-based chain will essentially rebuild and replace systems that in some cases are 15 years old. It will build and create systems that will be able to operate on improved public and private cloud platforms including Microsoft’s Azure technology. Of all the large bricks and mortar merchants, Albertsons is probably most in need of modernization of its web-based offerings and internal systems. Also from Albertsons comes the good news that our old buddy, Dennis Clark, has been promoted to corporate senior VP- merchandising and that former Mrs. Green’s CEO Pat Brown (ex-HEB, ex-New Seasons Market), who joined Albertsons in May as VP-merchandising strategic initiatives, now becomes group VP-merchandising where he will focus on deli and prepared foods and business initiatives…Blue Apron, the first meal-kit solutions company to go public, announced just prior to its June 29 launch date that proceeds from investors would be more than $150 million under target. That meant that the when stock opened at $11 per share it was well below the $15-17 per share that was originally projected. At presstime on July 12, Blue Apron shares were trading at $7.56…and speaking of a company that once had high hopes after its 2013 IPO, Fairway Markets just received a downgraded credit rating from Moody’s. The drop from a Caa1 to a Caa2 puts the Manhattan-based “like no other market” merchant at a higher credit risk and will probably result in a higher cost of capital to the company and its primary investor, Blackstone Group’s GSO Capital Partners, which acquired the retailer with another group of investors following a pre-packaged bankruptcy 14 months ago…bankruptcy, did I hear bankruptcy? Well not quite yet, but the smell of death is in the air for Sears Holdings, which just last week announced another round of store shuttering. This month’s number is 43 units, part of the 132 stores (40 Sears, seven Auto Centers, 85 Kmarts) that have been announced in several phases over the past six weeks. That brings the 2017 grand total to 312 closings for “Slow” Eddie Lampert’s failing retail empire…Sycamore Partners is set to acquire Staples for $6.9 billion in another example of a PE firm trying to revive a declining brand, utilizing its Staples real estate assets and solid cash flow as drivers. You might remember that Sycamore and its Dollar Express affiliate is suing Dollar Tree for allegedly helping the dollar store operator go out of business by utilizing confidential information to open new stores near where Dollar Tree stores were located. Dollar Express was formed in 2015 when Sycamore bought 330 former Family Dollar stores that were in “conflict” locations (as part of an FTC-mandated divestiture that allowed Dollar Tree to ultimately acquire Family Dollar). Sycamore/Dollar Express also accuses Dollar Tree of putting under-qualified and inattentive store managers in those divested locations…Danone, the French yogurt dynasty, has found a buyer for its Stonyfield unit – and it didn’t have to search very far. Lactalis, another French dairy company, has agreed to acquire the former family-owned business (founded by Gary Hirshberg in 1983) for $875 million. Danone put Stonyfield on the sales block when it acquired White Wave earlier this year for $10.4 billion. Lactalis, still a family-owned company, operates in 85 countries and already has significant U.S distribution with its President and Galbani brand cheeses…Bruce Besanko, Supervalu’s chief financial officer for the past four years, has left the Eden Prairie, MN-based wholesaler/retailer and will assume the same post for Kohl’s. SVU’s chief strategy officer Rob Woseth will handle the CFO duties on an interim basis while the company searches for Besanko’s replacement.
Local Notes
I finally visited my first Lidl stores and my impressions were mixed. The stores are nicely designed with a comfortable ambience and an easy-to-shop layout. Strong points included nifty packaging, a very good bakery presence (fresh baked bread aromas waft through the store) and an excellent wine presentation. Weakest department was clearly fresh meat, which in the two stores I visited was hardly fresh and certainly overpriced (at least when compared to relative pricing in other departments). I think that Lidl might regret making such a huge capital investment in acquiring its real estate (some future sites are in secondary or tertiary locations). A cursory 50-item price check against two nearby Aldi units found that Lidl was comparable but not as cheap as Aldi, especially in certain perishable commodities. It’s going to take a little while longer for the competition to fully gauge how it needs to compete with its new German rival, and to be fair, Lidl will also need some time to make the necessary adjustments in the markets where it opens. One advantage that Lidl won’t have when it cuts the ribbon for stores north of Virginia (Maryland, New Jersey, Delaware and Pennsylvania) – is that wine cannot be sold in supermarkets. That said, the discounter opened its second batch of “first round” stores on July 13 in Culpeper, VA; Chesapeake, VA; Havelock, NC; and Wake Forest, NC. The third and final group of “first round” stores will debut on July 27, all in the Richmond area. Additionally, the company whose U. S. headquarters are based in Arlington, VA, said it will build its fourth distribution center (and regional headquarters) in Cartersville, GA. That facility, located 45 miles from Atlanta, will open in late 2018, cost approximately $100 million and employ about 250 associates. Lidl currently is operational at its Fredericksburg area depot (which is supplying the group of stores) and in Mebane, NC and has its Cecil County, MD warehouse under construction…Kroger (and its Harris Teeter unit), which will compete with many Lidl future locations in Virginia, Georgia and the Carolinas, has filed suit against the discounter, claiming that its new “Preferred Selection” private label brand too closely mirrors Kroger’s long-established “Private Selection” own brand. Kroger claims in its suit that the close resemblance of the names will cause confusion for customers and allow Lidl to compete unfairly with Kroger because customers could assume that the two brands are associated with one another. And then there were the interesting comments made by Kroger CFO Mike Schlotman, who noted at a recent Oppenheimer Consumer Conference in Boston that he was glad to see Lidl finally open stores, so Kroger could gauge how effective its preparation had been. Even Schlotman admitted his logic was a bit unusual, noting, “People have looked at me kind of funny when I’ve been saying this, but I’m glad their stores are now open, and we can stop talking about what we’ve been doing to get ready and see if what we’ve done to get ready (was sufficient). We’re going to work against them just like we would with any competitor that winds up opening. Even if it’s a new Safeway across the street, you do something to combat that competitive threat.” We really like Mike Schlotman – he’s candid, funny and very, very smart…Weis has reopened its Tunkhannock, PA store, more than a month after a horrendous mass shooting by a violent suicidal associate cost three other associates their lives before the gunman then shot himself. In other news from the Sunbury, PA-based regional chain, it has hired industry veteran Ron Bonacci as its new VP-marketing and advertising, replacing Brian Holt, who moved on to a similar post as Spartan Nash. Bonacci was most recently senior director of marketing at United Supermarket in Lubbock, TX (a unit of Albertsons). He has also toiled for Kroger and Food City (K-VA-T) where he worked with Richard Gunn, Weis’ current senior VP-merchandising and marketing…a few deaths to report this month including Paul Gilbert, who served as director of real estate for Wegmans. A 23-year veteran of the Rochester, NY-based uber merchant, Gilbert was responsible for site discovery at more than half of Wegmans’ 92 stores and several others in Wegmans’ future development plans…our condolences also go out to the family of Harriet Green, sister of David Green (Save-A-Lot, B. Green), who passed away last month in Baltimore. In addition to her brother, Harriet Green leaves two children and five grandchildren…I’m sad to report the passing of Stephen Furst, the movie and TV actor who gained fame playing Kent Dorfman (aka “Flounder”) in the iconic comedy “Animal House” (1978). As Flounder, the hapless beanie-wearing frat boy nicknamed by the movie’s star John Belushi (aka “Bluto”), Furst was on the receiving end of one of the funniest lines in cinema history, when Faber College dean Vernon Wormer addressed the horrific grades of members of Animal House. In his assessment of Flounder’s report card, he uttered: “Fat, drunk and stupid is no way to go through life, son.” Furst was only 63.
