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Trading  | June 17, 2017

When describing the logic behind Amazon’s blockbuster acquisition of Whole Paycheck Foods, a deal that made the “greedy bastards” over at Jana Partners $400 million richer in just a few months, Credit Suisse analyst Stephen Ju explained that he views this acquisition as “an offensive expansion move to accelerate its progress in the largest consumer spend category. In other words, Amazon is paying roughly 3% of its enterprise value for an improved position in an addressable segment that amounts to ~$1.6 trillion according to the US Dept. of Agriculture’s ERS, especially as progress at Amazon Fresh (in terms of regional rollout) has been admittedly slower than we expected.”

He may be correct in the long-run but in the medium-term, Amazon Foods faces major hurdles, including a significant slowdown in how much Americans spend at food and beverage stores…

… and the arrival of German mega-discounters Aldi and Lidl on US soil, eager to steal market share by offering products below cost, already prompting a panicked response by the likes of Walmart (see “The Germans Are Coming… And Their Groceries Will Cost Up To 50% Less Than Wal-Mart“).

But the biggest risk facing the combined company in the short-term is the same one that follows every acquisition: “synergies” and how these will change the corporate culture at Whole Foods. In his letters to employees, this is what Whole Foods CEO John Mackey said:

Dear Team Members,


Today marks the beginning of an incredible new chapter in Whole Foods Market’s history. In my nearly 39 years as co-founder and CEO, I could have never dreamed of this happening, but I am excited to announce that Whole Foods Market has entered into an agreement to merge with Amazon at a terrific value for our shareholders.


This partnership presents an incredible opportunity to take Whole Foods Market’s mission and purpose to new levels and best positions our company and our Team Members for future success.


* * *

As you know, we are in a metamorphosis phase. While everyone processes change differently, this is an exciting new step to fulfill our higher purpose. Together, we have built an amazing company and have positioned ourselves to deliver outstanding value for Whole Foods Market shareholders — which includes many of you.

But not all, and as Bloomberg reports the initial step in the integration will be wholesale “cost-cutting”, i.e., mass layoffs to boost margins in what is already a cutthroat industry. Jeff Bezos “will try to keep the grocer’s reputation for premium fresh foods while cutting prices to shed its “Whole Paycheck” image.” To do that, “Amazon expects to reduce headcount and change inventory to lower prices and make Whole Foods competitive with Wal-Mart Stores Inc. and other big-box retailers, according to a person with knowledge of the company’s grocery plans. That includes potentially using technology to eliminate cashiers.”

As a result, Whole Foods employees are on edge about the monumental changes about to take place and as Reuters adds, some employees “expressed fears ranging from layoffs to the loss of their laid-back corporate culture.”

They have good reason to be worried, because what comes next is a wholesale deflationary replacement of the existing labor force with “robots and drones.”

Carmen Clark, 37, a six-year employee at a store in Mount Pleasant, South Carolina, said some workers worry that Amazon-led automation could lead to job cuts. “Everybody’s been kind of joking that it’s going to be robots and drones,” Clark said of potential changes from Amazon, which uses robots in its warehouses and is testing drones for delivery.

For now, Clark said she is giving Amazon the benefit of the doubt. “I have purchased from Amazon for five years. It’s a good company,” she said.

And she is right… if referring to consumers and shareholders. For employees it will be vastly different: Amazon is said to be considering extending the cost-cutting effort with the no-checkout technology it’s developing at its Seattle convenience store, “AmazonGo,” according to Bloomberg. The technology lets people pay with smartphones without seeing a cashier or going to a checkout kiosk, which would help Amazon differentiate itself in the brick-and-mortar setting and reduce labor costs at Whole Foods stores. The employees remaining would help improve the shopping experience, while terminating many of the company’s existing workers.

It is those same workers that Reuters approached for interviews in California, New York, Illinois, South Carolina and Rhode Island. While many said they had been told by managers not to speak to reporters, some expressed their concerns:

Some workers at the nonunion grocery chain wondered whether Amazon, known for its hard-driving culture, would mean big changes to their pay, benefits or employment. “I think that they are a very profit-driven company, so there might be some streamlining as far as labor,” said Sasha Hardin, 28, of the Mount Pleasant store, who has been with Whole Foods for 6-1/2 years.


A Los Angeles deli worker in his 30s, who is expecting his first child this summer, is worried about layoffs. “I want to keep working,” said the worker, who did not want his name used.


Whole Foods has a corporate culture that prizes inclusive decision-making, such as allowing workers to vote on benefits every three years and disclosing executive pay.  “I’ve heard that Amazon’s culture is really cutthroat. That worries me,” one bagger at a Providence, Rhode Island, store said.

Another major question is how the cultural change will impact the shopping experience, and whether it will accelerate what is already its worst sales slump since going public in 1992. Speaking to Reuters, at least one customer was concerned that an Amazon purchase would further distance Whole Foods from its roots as a purveyor of premium, organic and specialty foods.

This store has become a money-making machine,” said Tony Castro, a 40-year-old private chef, who shops daily in Whole Foods’ sprawling downtown Los Angeles store.

Ironically, none other than CEO Mackey predicted failure for Amazon as it tried to enter the grocery space: two years ago, Mackey predicted imminent doom for rival Amazon in the fiercely competitive grocery business. “Amazon Fresh is their Waterloo,” said Mackey, known paradoxically both for his earthy passion for organic foods and his imperious business swagger. “What’s the one thing people want? Convenience. You can’t do that with distribution centers and trucks.”

* * *

But no matter whether Bezos’ gamble on “bricks and mortar” pays off, two things are certain: between the aggressive push by Germans to steal existing market share, and Amazon’s disruptive, “price-cutting” entry into the grocery sector, prices across the industy are set to slide, resulting in yet another deflationary impulse hindering the Fed’s tightening efforts, as noted yesterday:

The other sure thing is that while the company’s employees count the days until the pink slip arrives, shareholders stand to reap the profits. As CEO Mackey said, “we have positioned ourselves to deliver outstanding value for Whole Foods Market shareholders.” And none more so than the “greedy bastards” whom Mackey was blasting just a fey days prior.

As for Bezos’ ultimate vision, Bloomberg sums it up best:

The deal is stunning many of Amazon’s closest observers and then, upon a moment’s reflection, finding a comfortable place in their understanding of the limitless ambitions and wily determination of Bezos, the world’s second-wealthiest man. In a sense, the surprising deal is preordained by his mission to construct the everything store: A company that delivers everything to everyone, at the best possible price and within the shortest amount of time.

In other words the creation of a monopoly unseen since the Gilded Age, and one in which the Trump adminitration may have a final say.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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