Amazon to Buy Whole Foods: Did the Market Overreact?
Grocers lost billions
The grocery business is a tough business with razor-thin margins and fierce competition that’s having to cope with shifting consumer preferences. Now Amazon (AMZN) is throwing one more challenge at the industry.
With many retailers adopting technology to better compete with online rivals, Amazon went the other direction and announced that it has entered a definitive agreement to acquire Whole Foods (WFM). After the announcement, stock prices of grocers and mass merchandisers nosedived, erasing billions of dollars from their market caps.
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Why markets might have overreacted
Amazon has a history of disrupting sectors. For instance, we witnessed what it did to books and electronics when it entered those arenas. However, the market’s reaction to Amazon’s announcement could be an overreaction because the grocery business is a different ball game altogether. Amazon has been in the grocery business for quite some time now with its AmazonFresh business, which hasn’t seen the success that its other businesses have seen. Moreover, grocers, especially Walmart, are lowering prices and adopting technology to better position themselves against the growing threat.
However, Amazon’s move is indeed a big step and could have serious implications on the performance of many grocery retailers including Kroger and Target, who are witnessing sluggish sales. However, for Walmart and Costco, the market’s reaction is much ado about nothing. Continue to the next part where we’ll discuss why Amazon’s latest move will have the least impact on Walmart and Costco.