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4-Traders Homepage  >  Equities  >  Nasdaq  >  Whole Foods Market, Inc.    WFM

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Amazon's Grocery Ambitions Spell Trouble for Big Food Brands

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06/26/2017 | 11:45am CEST
By Annie Gasparro and Laura Stevens 

Amazon.com Inc.'s deeper push into the grocery business threatens to further pinch packaged-food companies already coping with slowing sales.

An enduring shift by consumers toward fresh and natural options is eating into the business of big food brands, like Kraft Heinz Co., Kellogg Co., and Mondelez International Inc. They also face growing competition from store brands and upstarts.

Now, Amazon is preparing to expand into the sector with its proven history of aggressively driving down prices.

Amazon's deal to buy Whole Foods Market Inc. for $13.7 billion, including debt, was disclosed about six weeks after its first meeting with executives. Because the deal came together so quickly, Amazon hasn't yet had the time to develop a complete strategy, according to people familiar with Amazon's thinking. But the company is likely to leverage its negotiating expertise and the combined scale of the business to push for lower prices from suppliers, they said.

Amazon "will keep squeezing national brands on pricing," said James Thomson, a former senior manager in business development at Amazon and now partner at brand consultancy Buy Box Experts.

Amazon's initial priority will likely be to lower Whole Foods' operating costs so that it can charge less for groceries, in hopes of winning more customers, according to the people familiar with the company's thinking.

Amazon and Whole Foods declined to comment for this article.

Whole Foods Chief Executive John Mackey told employees earlier this month that one of Amazon's core values was "frugality," hinting at a greater focus on cutting costs and lowering prices for shoppers.

Whole Foods' sales have suffered over the past two years, partly because of a perception among shoppers that its offerings are too expensive.

"If Amazon steers Whole Foods away from its 'whole-paycheck' image, and successfully sells Whole Foods' products online, then 'Big Food' faces the threat of losing even more market share," said Rabobank food analyst Nicholas Fereday.

Mondelez's comparable sales in North America declined by 1.9% in its most recent quarter. Kraft Heinz's U.S. comparable sales fell 3.5%, and Kellogg recently lowered its 2017 comparable sales growth forecast to negative 3%, excluding currency rate fluctuations. Most packaged-food companies have turned to cost-cutting to boost their profit margins .

Amazon has worked on developing its own private-label, and last year made a big push into perishable food. Analysts and former employees expect the company to use Whole Foods to build out its own labels and capitalize on the grocer's success with its 365 brand, which accounted for 15% of its most recent fiscal year's sales.

Amazon's Whole Foods deal could also widen the reach of natural and organic brands by putting them online, making them more competitive with traditional, ubiquitous brands.

Alexander Pease, chief financial officer of pretzel maker Snyder's-Lance Inc., said at a conference last week that the deal would generate another "level of discussion with [retailers] around price."

But Susquehanna Financial Group analyst Pablo Zuanic says Amazon and Whole Foods' combined share of about 4% of U.S. grocery sales hasn't enough "clout" to hurt big food companies in the way of bargaining power.

It could also take time before food makers start feeling pressure, because the deal hasn't been completed, and Amazon's strategy for Whole Foods could shift, the people familiar with the company's thinking said. The deal is expected to be completed later this year.

Companies such as PepsiCo Inc. and Mondelez, which have top-selling brands and a global presence, are best positioned to withstand the impact of a combined Amazon and Whole Foods, some analysts said.

But mainstream brands with less market share are likely to get squeezed by niche organic options on the high end and private-label copycats on the low end, they said.

UBS analysts see Campbell Soup Co. and Conagra Brands Inc., two less diversified players which are already facing big problems as consumers move away from packaged-foods, as some of the companies that could suffer most from the combination of Amazon and Whole Foods. Campbell's comparable sales fell 1% in the latest quarter. Conagra's comparable sales fell 4.8% in its last reported quarter.

"We enjoy good working relationships with both Amazon and Whole Foods and expect that to continue," a Campbell spokeswoman said. Conagra declined to comment.

In the past, Amazon has been willing to lower price tags at the expense of margins to gain traction in a new market. Amazon's stock has risen even when profits didn't, indicating investors' patience with the company's strategy to push for long-term gains.

Mr. Thomson the former Amazon manager, said that in its bread-and-butter online retail business, Amazon has taken a tough stance to match or beat competitors, even if that meant prices dropped below a brand's minimum. The company also typically attempts to negotiate lower prices with brands each year, he said.

And when it comes to private label, "Amazon will move much faster at building new brands than any national brand can today," Mr. Thomson said.

Write to Annie Gasparro at [email protected] and Laura Stevens at [email protected]

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Financials ($)
Sales 2017 15 913 M
EBIT 2017 718 M
Net income 2017 394 M
Debt 2017 192 M
Yield 2017 1,46%
P/E ratio 2017 33,18
P/E ratio 2018 30,60
EV / Sales 2017 0,87x
EV / Sales 2018 0,85x
Capitalization 13 724 M
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Whole Foods Market, Inc. Technical Analysis Chart | WFM | US9668371068 | 4-Traders
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Mean consensus HOLD
Number of Analysts 23
Average target price 37,9 $
Spread / Average Target -12%
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Managers
NameTitle
John P. Mackey Chief Executive Officer & Director
A. C. Gallo President & Chief Operating Officer
Gabrielle Sulzberger Chairman
Keith Manbeck Chief Financial Officer & Executive Vice President
Jason J. Buechel Chief Information Officer & Executive VP
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1st jan.Capitalization (M$)
WHOLE FOODS MARKET, IN..39.61%13 724
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ALIMENTATION COUCHE TA..0.52%26 400
CARREFOUR-3.84%18 614
DAIRY FARM INTERNATION..12.15%10 739
YONGHUI SUPERSTORES CO..44.40%9 928
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