Breaking news: Amazon buys Whole Foods for $13.5bn

For as long as it didn’t have a food business, Amazon was vulnerable.

Today we learned that Amazon is buying the grocer Whole Foods for $13.5bn.

It’s the strangest thing – at some point last week I thought to myself, “Amazon needs to buy a grocery business.”

I had the thought because I signed up to Ocado recently, the online grocer. I got one of their smart passes which give you free delivery. And since joining Ocado, I’ve spent a lot less with Amazon.

It’s very simple: you need food every week. Once you start buying food online, the place that sells you food can start selling you everything else.

For as long as it didn’t have a food business, Amazon was vulnerable.

Amazon is only worried about one other company: Walmart. Walmart has giant scale. It has a big grocery business. And it’s ploughing billions into e-commerce in an effort to catch up to Amazon.

Walmart wants to be more like Amazon; Amazon wants to be more like Walmart. Whichever company can copy their rival faster will win.

And that’s why this Whole Foods deal makes so much sense.

Okay, fine, I don’t have a discounted cash flow model of Whole Foods’ operations. I don’t know whether $13.5bn is exactly the right price. It’s only been half an hour since the news broke.

But I can say that this makes a whole lot of sense from a strategic point of view.

You see, Amazon’s always had trouble selling food. Why? Because Amazon’s fulfilment centres are designed for processing non-perishable goods like toys and books.

Amazon can’t just dump a crate of tomatoes on row ZZY block 5532, beside the fidget spinners and patio furniture.

In order to do groceries, Amazon needs a whole new distribution network which is built around food. In other words it needs more small warehouses, which are nearer to the customers. And yes, having a a couple of hundred high street shops helps too.

Amazon’s new distribution network:

Click image to enlarge.                          Source: Bloomberg

There’s a Whole Foods near me in Stoke Newington; it’s lush. It sells fancy, tasty, healthy, expensive food for yuppies. Amazon on the other hand is obsessed with world domination by selling stuff on the cheap – profits be damned.

Whole Foods at Amazon prices. Who wouldn’t shop there?

The day Amazon becomes your competitor

Here’s the Super Value share price today…

Click image to enlarge.                      Source: Bloomberg

Here’s Target’s:

Click image to enlarge.                      Source: Bloomberg

And finally, the day’s best and worst performers among S&P 500 companies. For reference – eight of the red numbers are retailers.

Click image to enlarge.                Source: Bloomberg

It’s not like today’s news tells us anything fundamentally new about Amazon. We always knew it planned to take over the entire retail industry, everywhere.

Today we’ve seen that it’s got a smart plan to achieve it. It’s probably going to become Walmart long before Walmart becomes Amazon. And in ten years time, Bezos might be the world’s first trillionaire.

By now you know that I’ve figured out a better way to invest in Amazon, for a shot at much bigger returns than buying the stock.

If you haven’t clicked yet, what are you waiting for?

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