Whole Foods acquisition by Amazon changes retail strategies

On the last day of June 16, Amazon gave another strong signal to all retailers. The e-commerce giant announced its intention to buy Whole Foods, one of the largest networks of healthy foods, for $ $13.7 billion.
Stock prices of Wal-Mart, Kroger and Costco fell. The New York Times described the Amazon as the "new generation of Silicon Valley conglomerates."
The size of the business is atypical. Since listed its shares in 1997, Amazon acquired about of 80 other companies, including IMDB (provider of information about tv and movies), Twitch (site of video transmission), and the Audible (audiobooks), among others. In all previous acquisitions, Amazon has avoided large sums.
The biggest deal so far was the purchase in 2009 the online retailer Zappos.com shoe, for about $ $1.2 billion, which was just "okay" with the announcement of Whole Foods.
The market reaction was strange. Economists and financial analysts perform often "event studies", examining how markets react to announcements of this genre, if the market understands certain investment announced by a company like aggregator or destroyer of value.
To succeed in buying a company of interest, stakeholders tend to pay more, the acquisition premium, i.e. the difference between the estimated and actual value the price really paid. Amazon''s offer represents a premium of 27 percent on the closing price of the shares of Whole Foods on Thursday, November 15.
Similarly, when Microsoft acquired the LinkedIn for $ $26.2 billion, this award was of the order of 50%. Last year, the AT&T announced the acquisition of Time Warner and paid a premium of 35%.
In the short term, therefore, the company acquired tends to win, while the buyer loses. For example, immediately after the announcement, as expected, the stock soared 47% of LinkedIn, reaching $ $192.21, while that of Microsoft fell 2.6%, reaching $ $50.14.
Between 19 and 26 October 2016, the market value of AT&T decreased to almost US $ $20 billion, while Time Warner grew to $ $8 billion. Traditionally, that''s exactly what happens after an acquisition is announced. Except, when is Amazon.
On that Friday, Amazon''s shares climbed 2.4 percent, adding more than $ $11 billion in your market value, nearly coinciding with the price to be paid in the operation. And shares of Whole Foods rose by 29%, to $ $42.68, the highest level since may 2015. And on Monday, 19 June, rose even more, because every action has reached $ $43.22.
So, exactly what is so special at Whole Foods – which has been facing falling sales and suffered a recent change in senior management – which could lead to Amazon this movement? Why investors shook front of Jim Cramer of CNBC called it "the most disruptive thing in years?"
Not all acquisitions are equal
In 2001, Joseph Bower of Harvard Business School, wrote an important article in the Harvard Business Review, in which he described as managers often put all mergers and acquisitions in the same, when, in fact, represent very different strategic activities, each facing different challenges.
Mix them all just makes it harder for an M&A operation. This explains, in part, a history confirmed by most studies: 70% to 90% of mergers and acquisitions are not successful.
When a CEO wants to increase the performance of your business, the most common form of M&A in a mature sector is consolidating capabilities.
In may 2016, Nissan acquired 34 percent of Mitsubishi Motors. Carlos Ghosn, CEO of Nissan, said that "we have the potential to be among the three largest players in the market". This is the business logic of eat or be eaten. The company buyer closes the less competitive units, eliminate overlapping functions, reduces idle capacity and improves operational efficiency. The goal is to achieve greater economies of scale to reduce costs.
Alternatively, top management can use M&A to take a leap aimed at long-term growth, is starting a "geographical" expansion or seeking "extension in line of products or markets".
The company buyer enables the newly acquired take advantage of existing model to supercharge your growth. When the Spinbrush was acquired, gained immediate access to distribution channels that P&G has developed over the years. When VMware was purchased, took advantage of the extensive list of EMC customers.
Few changes in relation to the strategy or operational models were required. The synergy was visible and immediate.
Obviously, what may seem a perfect match on paper may not be so in reality. The success of Frito-Lay''s acquisition by Pepsi-Cola, due to the direct delivery logistics system that PepsiCo has improved over the years, was not repeated when she acquired later to Quaker Oats.
As this merger was going on, the teams of PepsiCo discovered painfully that traditional delivery method of your distribution centers had very little in common with that of the Quaker and, as a consequence, this purchase failed to achieve financial expectations.
The most interesting perhaps is the third type of mergers and acquisitions, which is to invest in a company whose business model has yet to be proven. The target company is often focused on acting so disruptive in an existing industry.
The acquisition therefore aims to anticipate future competition greater than buying a disruptive business model. That''s what led Wal-Mart to acquire Jet.com for $ $3 billion in 2016.
The same can be said of the acquisition by Unilever of Dollar Shave $ $1 Club billion or $ $500,000,000 of General Motors in Lyft.
Despite the growth prospects, these startups were far from achieving profitability. However, they have opened possibilities of oxygenate existing businesses, maybe even exceeded, of already established companies.
Acquire to reinvent
Seen this way, the purchase of Whole Foods by Amazon is truly a unique operation. None of the conventional reasons can explain this acquisition. On the one hand, Amazon won''t be consolidating food industry.
In 2016, the Walmart commanded the lion''s share with 14.45% in this market. In the same year, Whole Foods filed a small part of 1.21%, while Amazon had an insignificant 0.19%.
The categories of products between Amazon and Whole Foods are also far enough apart that it''s hard to imagine a viable strategy of "one-stop-shop", one stop shopping. It is unlikely that quinoa lovers buy a e-reader or a speaker kit wi-fi while you shop at Whole Foods. And Whole Foods definitely won''t cause nuisances to Amazon.
Still, with Whole Foods under your control, Amazon can take your retail experimentation to a new level. Famous for your "test and learn" approach, the CEO Jeff Bezos comes opening physical bookstores and convenience stores without boxes. Scanning: TOTVS explains the urgency of digital culture for retail Sponsored by visiting any of the bookshops from Amazon, you can find news and differential everywhere; each book is positioned with your cover exposed, instead of the spine, as is customary in traditional stores. Small black cards are placed below each book with data of customer reviews from Amazon.
"We love this mix between creativity and data, and to understand our customers and continually trying to learn how we can make a better store for them," says Jennifer Cast, Vice President of Amazon Books, known as Geekwire.
But these stores aren''t just physical distribution channels; There are only a few of them. They are research laboratories.
The Amazon Go follows on the same line. Customers buy perishable products, such as bread, cheese and milk, as well as they can do in 1 7-Eleven, except that there are no boxes.
The person enters, takes what he wants and goes out normally. All items are charged automatically on the client''s own account. A patent filed in 2014 shows that the Amazon system combines integrated sensors, machine learning and artificial intelligence, which for a camera system (such as the autonomous cars manufactured by Tesla and Google) to identify customers and items purchased.
But this is experimentation. At some point, when the learning is more broad and sufficient and the real opportunities appear, the Administration should commit to a clearer strategy.
According to the research firm Cowen & Co, online purchases represent less than 4% of the total sales of food and beverages. Consumers continue to buy eggs, milk, fresh meat and vegetables in local grocery stores. In contrast with the paucity of books, CDs and electronics, 80% of the U.S. population are close to a supermarket, at most 2.5 miles, to where they live. If Amazon grow, fresh products will be the next frontier.
What Whole Foods brings is a strong footprint with 456 stores in the USA, Canada and United Kingdom, along with an affluent customer base – as reflected in their prices; urban-as revealed by the location of their stores; and cutting-edge – as evidenced by the mix of goods.
These are ideal demographic references to Amazon to deepen relationships with customers through your virtual assistant Alexa – powered by your analysis of data increasingly sophisticated and in partnership with third parties via an open application programming interface (API).
I can''t even imagine the endless possibilities that Amazon could begin to reshape each item in the Whole operation...