by Ralph Rader
What does Amazon’s acquisition of Whole Foods have to do with your Retail Center?
The ripple from Amazon’s $13.7 billion acquisition of Whole Foods’ 440 food centers and 11 regional distribution centers has affected retail centers around the country. Of course, the implications vary depending on the tenant roster of a given retail center, but is still impactful even if a center doesn’t include a Whole Foods or even another grocer. In one fell swoop, Amazon shook up the grocery market and sent a message to the broader real estate market that there’s still a need for brick-and-mortar.
Whole Foods’ anchored retail centers obviously received the biggest benefit. Grocery customers are excited at the prospect of Amazon lowering prices at Whole Foods; furthermore, excited customers make investors happy. The $13.7 billion deal, easily Amazon’s largest, paid $42 per share in an all-cash deal, 27% higher than Whole Foods’ stock price at the time of $33.06. Despite this seemingly incongruent move, investors widely applauded the deal, sending Amazon’s stock up 2.4% the day after the acquisition. If you happen to be the proud owner of one of these assets, the date of this acquisition was a good day for you.
Grocery anchored centers with competing upscale grocers, such as Trader Joe’s, stand to suffer the most from this deal. Whole Foods has already begun to increase market share over these premium grocers and this trend is likely to continue. Now, this is certainly not the end for these other high-end grocers. Customers are more willing than ever to shop at several different stores to get all the items on their shopping list. This means there will be room for competitors in this space, but potential investors should proceed with caution in centers such as these. It’s important to analyze grocers’ sales trends and review their leases for items such as corporate guarantees and termination rights.
Value grocers like Kroger, SuperValu and Publix likely won’t feel the effect for years, if ever, due to their different customer bases. The reality is, Whole Foods is a relatively small player in the overall grocery market and they were already struggling to retain market share, as new mainstream grocers like Kroger, SuperValu and Plublix added organic and specialty items. Even if Whole Foods continues to offer lower prices on select items, they will never compete with mainstream grocers on total cost of a trip to the grocery store. The niche appeal of Whole Foods will, for the foreseeable future, limit the threat to these other grocers and the retail centers where they reside.
Perhaps the most important takeaway from the acquisition was the clear signal Amazon sent to the broader market that brick–and-mortar retail isn’t going away anytime soon. Amazon had been trying to find a way into the grocer market through their PrimePantry and AmazonFresh programs; however, they never really achieved the kind of market penetration they likely intended. Fresh produce, more than any other item, is subject to Amazon’s “Last Mile” dilemma: bridging that final small distance from distribution hub to individual customer. Global logistics systems are great at moving immense amounts of goods over long distances to distribution points around the world. Nonetheless, it’s that last mile that presents a challenge, especially those in the business of delivering fresh goods; these items can’t simply be left to rot on customers’ doorsteps. Combine this Last Mile dilemma with the fact that grocery customers like the ability to touch and choose their produce and one can see why it’s been so difficult for Amazon and others to find success with online grocer orders and delivery. Thus, you have Jeff Bezos adding Whole Foods and its 440 stores to his shopping list. As Mark Thompson, managing director with Crossman & Co. in Orlando, who specializes in grocery -anchored real estate, said at the time of the acquisition, “You had the largest, most successful retailer say, ‘The best next strategic move for us is brick-and-mortar.’ They just spent $13.7 billion telling the world, ‘You need brick-and-mortar.” Madeline Hurley, a senior analyst with IBISWorld Inc., agreed that the move is a further validation of physical storefronts. She adds, “It’s a way to say brick-and-mortar isn’t dead. There will always be a place for it.”
Amazon’s acquisition of Whole Foods represents the latest shock to a rapidly changing retail market. Metropolitan Capital Advisors can help navigate the changing retail landscape regardless of the make-up of your retail center. We can help identify both risks and opportunities as the markets react to big moves such as Amazon’s Whole Foods acquisition and the continued evolution of the overall retail market.
The author, Ralph Rader, is a Senior Financial Analyst in the Dallas office of Metropolitan Capital Advisors. Ralph can be reached at [email protected] or at 972.267.0600.