Jason & Scot Show Episode 89 Hot Take Amazon acquires Whole Foods

A weekly podcast with the latest e-commerce news and events. Episode 89 is a hot take on the Whole Foods acquisition by Amazon.

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Amazon agreed to spend $13.7 billion to buy the grocery store chain Whole Foods Market Inc., which has more than 450 stores.  The grocery category is a $795B opportunity in the US that has largely been untouched by digital.

• Terms of the deal
• Wall Street reaction
• Impact on the grocery category
• Winners and Losers

Amazon-Scape that Scot mentions on the show

Amazon Deep Dive EP24 Podcast

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Episode 89 of the Jason & Scot show was recorded on Friday, June 16, 2017.

New beta feature – Amazon Automated Transcription of the show:

Transcript

Jason:
[0:25] Welcome to the Jason and Scott show this is episode 89 being recorded on Friday June 16th 2017 I’m your host Jason retailgeek Goldberg and as usual I’m here with your co-host Scot Wingo.

Scot:
[0:39] Hey Jason welcome back Jason Scott show listeners tonight we are disrupting our usual weekly schedule for a new.

[0:47] A schedule format that we call a hot take this is going to be an episode where we really go deep on one big news item.

[1:11] Unless you’re sleeping on a rock that big news item today is Amazon’s 13.7 billion dollar acquisition of Whole Foods Jason what do you think pretty crazy day in the world of the e-commerce and Grocery on.

Jason:
[1:25] It it was it was totally inconsiderate I woke up this morning with a full agenda of things I had to do and this completely disrupted it.

Scot:
[1:33] Cool so let’s kick it off at I’m really curious to hear your thoughts you and I haven’t had a chance to talk about it so this is definitely a hot take let me kick it off with a little bit of.
Data so the deal was at $42 a share it was announced this morning before the Market opens so that’s a 27% premium to the the share price from yesterday.
As I mentioned at the top of the show 13.7 billion dollar valuation.

[1:59] So Whole Foods has 460 stores they are mostly in the US they do have some stores in other countries,
87000 team members I think the last number I saw I had Amazon at 3:40 340,000 so this puts Amazon well over 400,000 employees,
another little nuances there’s a 400 million dollar breakup fee and what’s interesting about that is the way these deals work is you know they.
You you got there you submit a bid you work with a board the board except said but as a public company they have to accept bids from other folks.
And a deal of this size has to go through quite a bit of shareholder and Regulatory governmental kind of approvals so.
The breakup fee kind of indicates that Amazon felt like there was some risk that there could be a competitor competitive bid and then the market reacted also.
Closing at 4286 today so some hedge fund manager out there is willing to pay a little bit more than the $42 a share as kind of a bit of a hedge to see if another bitter comes in so.
Now that the kids this could be the start of the drama so I have to kind of see using things happen pretty quickly and within the first 15 to 30 days so.
I know relatively quickly if there’s going to be another bit or not so that’ll be interesting so Jason.

Jason:
[3:18] What does that is that for a million breakup feet is that in some sort of like a poison pill that makes it less appealing for someone else cuz they would lose the former million value of what they just acquired.

Scot:
[3:28] Yes so that just means that it has to be 13.7 + .4 so 14.1 so they would have to.
Go to have to cover that and it just means that you know it can’t be 13.7 one.
Really so it’s Amazon Amazon’s argument on that would be this is how much money were investing in this and the Damage that would cause if you chose another bid so yeah.
I don’t think it was 5 billion it would be insurmountable but I think it’s small enough that it is not really a poison pill.

[4:03] Yeah so I’m really curious what your your high-level thoughts are on this since you’re kind of real close to the grocery world.

Jason:
[4:11] Yeah what should I think.
Thematically this makes a lot of sense we’ve talked a lot on the show lately about the grocery business and in my opinion at least that,
did the the mass market for grocery is buying line pick up in store or order online pickup in-store in the.
That requires you to have shorts and so you know a lot of the traditional retailers with would say hey this is one area where we potentially have a competitive advantage over Amazon,
you know they’ve been in the space for 10 years they haven’t captured a lot of market share they don’t have a really strong brand for fresh and they don’t have any of these stores for pickup in-store so then you know couple months ago we talked about Amazon opening in the,
the Amazon fresh pickup location which was their first pilot of a online pickup in-store experience,
you know back then we said and if this works if this proves out to be the right model for grocery pretty pretty likely that Amazon will scale and scale at will either,
mean by someone that has a lot of stores or open a lot of stores and so you know.
Fast forward not very long I think less less time than any of us suspected and Amazon bought 460 stores.
To give them great buying like pickup in store locations that overlap there their existing Prime Membership very well and,
really bolster their their creds in the fresh-faced and it turns out in in grocery what really drives your selection of the vendor very often is the quality of the perceived quality of the the fresh stuff in the produce and so so like on all the scores at this seems like a.

[5:47] A very logical move for Amazon.

Scot:
[5:52] Cool see you think so the prime pick up hasn’t been open long enough to really have much data I don’t think so so it’s not entirely clear that.
That’s winner and now they’re putting their pedal to metal there may have been something more even opportunistic because Whole Foods had an activist kind of in their rattling some swords their valuation of been down a lot of folks shareholders had one of them to seek a strategic,
buyers and they’ve been struggling because they kind of invented organic category and now every other grocery store has organic,
it may not be true organic I don’t know the whole Nuance of that but the other perception is out there that now Whole Foods is kind of out there alone with just organic and they’re super expensive,
so it goes more opportunistic or do you think Amazon sees something with one of these tests they have going on that says scale now.

Jason:
[6:47] Yeah it will no I think you’re certainly right that they haven’t had time to collect enough data to have those tests like influence this but like clearly they could have already made the decision that that buy online pickup in-store,
is going to be a mainstream delivery model for for grocery and into your point like there’s a lot of opportunistic elements here in one,
we haven’t discussed yet is you know Whole Foods was a little distressed which which presumably affects the price but there’s,
a lot of new headwinds coming into the grocery space that we’re not going to be favorable to Whole Foods so one of the most feared grocers on the planet is this German company called the Lidl,
and then they literally just Grand open their first crop of stores on the East Coast this week they plan to have 600 stores in the US,
what their model is is super low prices very No Frills on the service but very high quality organic produce so it’s,
give you that that great quality fresh mostly through private label and and locally-sourced stuff,
add an extremely low price and then a lot of markets they’ve been able to get way below the traditional price leader in so,
that’s a scary entrance to the US market internationally those guys compete with another German company Aldi quite a bit all the RT has a footprint in the US and they announced last month that they’re going to invest.
Another I think four billion dollars in the US to dramatically expand their footprint so if you had Whole Foods that was already in a rough spot.

[8:19] You got all of these two scary new entrance Aldi and Lidl coming in into the market you have Amazon saying shoot we need a footprint of stores we need more credibility in fresh,
to release kale Grocery and you know groceries the biggest.
Consumer retail segment that that you know hasn’t really been dramatically impacted by digital yet so I feel like it was just sort of a perfect storm of,
there was a good acquisition Target that had a lot of reasons to sell an Amazon had some strategic reasons to buy.

Scot:
[8:52] Cool and then one of those guys owns Trader Joe’s right so is it Aldi don’t they already own Trader Joe’s.

Jason:
[8:59] I think that’s a hold is who you’re thinking of.

Scot:
[9:01] Yeah this whole grocery space everyone owns every other one I most like will what about Food Lion and then it’s part of a conglomerate that the kind of rolls up.

Jason:
[9:10] That absolutely there’s a lot of like there’s these all were independent little Regional Grocers then and there been already been a lot of consolidation so that you know Kroger is the largest.
The stand-alone grocery retail in us that you know they’re the result of the ton of of consolidation and then Albertsons Safeway is the second biggest and there they own a bunch of the Regionals including some of the ones you just mentioned and.
You know it just goes down from there although there aren’t there still is a long tail there still are a lot of small Regional grocery stores that may be only five or six stores in the market.

Scot:
[9:44] Tell me one of the things I always look to is it’s on the Wall Street reports that are out there a lot of them have covered some of the math weave walkthrough,
one of the ones that was interesting was that you point it out it’s the largest acquisition Amazon history so that’s kind of interesting and the question was just this this is me we have a new.
Your new world order here is are we going to see some more really big swings kind of a thing that’s interesting to think through another one.
So Cowan was pretty aggressive and by their math this makes them the number 5 retailer,
set for grocery and they did all the math of taking grocery out of Costco and that kind of thing and then they projected Amazon could be in the top three by 2021,
and I looked at that that would have to be pretty crazy gross I’m see if I will spreadsheet here I think that got them up till like 80 billion to get the number 3 based on the my back in the boat math.
Does this drive with your your kind of understanding of the grocery market.

Jason:
[10:50] Yeah although like I do think that there’s a there’s like retail there’s a bunch of different definitions of grocery and so like I think there’s a couple different size of Market figures out there but but the direction I think that toy makes sense.

Scot:
[11:06] Cops in woods,
what do you think about integration so so let’s say you are you know you’re Jeff Bezos congratulations you’re you’re extremely rich and you now own you’re going to own Whole Foods what what’s your integration plan like at where you take this thing.

Jason:
[11:24] I think you’re going to give away a fire phone with every purchase.

Scot:
[11:28] Something damn you just left I can have to spend them back up.

Jason:
[11:31] Got you and maybe a Washington Post subscription.

Scot:
[11:35] Oh yeah you definitely.

Jason:
[11:36] No I mean like the real answer is who knows like you know superficially.

[11:44] You’d eat a Whole Foods was not very digital you you couldn’t order online you know that in fact they Outsource most of their digital Miss to.
Our friends at instacart that I’m sure we’ll talk about on on this episode and so suddenly you know if your jet pays us the main thing you’re going to do is.
To help help Whole Foods catch up digitally you may integrate ordering into the the Amazon Fresh order portal or you might create your own portal for Amazon for.

[12:14] Foods you’re going to.
Definitely you know figure out a way to Market that ordering online to your 250,000,000 Amazon members and your you’re sixty or seventy million Prime members and all this or two things that maybe even try to offer some prime incentive for shopping at Whole Foods.
And you know just really use Amazon scale to sort of fixed some of Whole Foods eels.
I feel like it step 1 and then longer-term you know.
That’s 460 distribution centers that like are in that last mile delivery Zone to a lot of Amazon’s most valuable customers so do you start figuring out how to.
How to turn Whole Foods into a mini Amazon Prime now Depot of some kind and and use it for distribution for more products do ya.
You know start except for the first time accepting,
returns from online purchases in a physical presence and you know some of those things right like so they’re about to places that can play out there’s a lots of potential synergies in the Echo System that you can imagine,
that that Amazon could have leverage to make you know all these parts more sticky but like you know I suspect like part of the value prop to to Amazon has to be,
that the Whole Foods was sort of a flat ass at and that Amazon has the the unique skills to help resolve that fly and so they they can buy it for the discounted price and then you know turn it into a more valuable asset.

Scot:
[13:40] How about just kind of blocking and tackling in grocery do you think Amazon can go in there and I certainly not their mindset to be the high price kind of,
differentiator for sure and category so you would they go in there and and lower prices so for like Zappos I could argue while they didn’t redo that was Apple’s Apple still doesn’t like the cheapest place to buy shoes so you know.
But at the same time I think Amazon probably lies this you can’t win grocery bye bye being relatively expensive so curious what you think about that.

Jason:
[14:13] Yeah I do think that both from Amazon’s value proposition and and you know the the typical flywheel that they usually like to,
to execute is going to require lower prices that pull more people in that store and then the external pressure that we talked about earlier with you don’t Walmart significantly investing and pricing Grocery and all the doubling down and and wheedle entering the market like I don’t think,
Amazon strategies going to be to sit tight as the premium offering and you know frankly.
We’ve all seen that sitting sitting at the premium price point just just hasn’t worked for Whole Foods.

Scot:
[14:51] Yep what do legal in Aldi do around buy online pickup and delivery today is that an area of innovation for them or it’s more just like the the super low prices.

Jason:
[15:00] So we don’t know about Weedle in the US yet like they they 10 offer that in markets where it’s heavily adopted so I cuive talk a lot about the UK that being on much more common tomorrow Nolan just turn mine listeners,
about 1% of grocery sales in the u.s. is online that 6% in the UK is online and it’s mostly click and collect.
So they do offer a click & collect in the UK for example all the has not offered really any digital experience in the u.s. today so.
You know.
It will be interesting to see art like are they looking to be a fast second mover and is the consumers adopt that model they’ll jump on it like they did in some of the foreign markets.
Will the threat of Amazon cause you know all of these retailers to come to accelerate their digital plans like you know I think that’s.
Going to be one of the fun things to watch and I should mention the while we’ve been talking the the Jason Scott show in terms of frantically been trying to get my attention and point out that as usual Scott was right Jason was wrong in.
Trader Joe’s is owned by all these parent company.

Scot:
[16:05] Stop stop happen again.

[16:12] So one one thing that’s interesting is in for listeners that haven’t listened every episode first of all shame on you and II of also Prime now is in 46 markets I think last time maybe a couple more they’ve opened up some International and still it was caught 46 248,
and the way they do those deliveries is Amazon has their own Uber like.
Driver system called Flex so you know one of the things that it’s interesting I know you’re a big fan of the Click and Clack model but it seems to me they could scale that up pretty quickly I I’ve heard that there is.
A lot of the demand from drivers cuz it pays orders of magnitude more than an Uber kind of a thing just got better than City and you’re you’re bringing groceries around and not people and and evidently.
People tip better for whatever reason I guess they appreciate groceries more than people so you know it seems to me one thing that could do pretty quickly is have Whole Foods have a better delivery kind of experience where there’s no.
Charge or it’s part of a prime offering would you don’t you do you think that’s likely or you just start convinced that’s kind of.
The best way to solve the grocery problem.

Jason:
[17:21] No I think it’s very likely and there’s a segment of Shoppers that want that right like both from a geographic Stan,
point and from an economic standpoint I just don’t think that that segment of Shoppers is the mass market so for sure,
Whole Foods in a Musa a reasonable amount of volume in home delivery through their instacart partnership it’s it just wouldn’t be profitable if the VC’s weren’t paying instacart to deliver those groceries right inside of certainly.
Amazon will be in a much better position to take that over and scale it and add some operational efficiencies there and so I suspect we will see,
both better click and collect experiences and better home delivery for you know the customers that want that and and you don’t can be home at the right times to accept the deliveries.

Scot:
[18:09] Cool what when area I kind of read some things about was.
In an area that’s near and dear to your heart is payments and you know one of the Welsh you guys pointed out that one of the areas that gets the highest complaints about the the Whole Foods experience is waiting in line at the checkout,
see the Gammas on could apply some of their payment kind of methodology and then another the first thing I thought about was the ghost or at I know that’s not really ready for prime time but,
you know there’s got to be a lot of automation at the checkout there do you know if you were going to do that Amazon’s assets what would you do to speed up that checkout experience.

Jason:
[18:44] That one of the first things you could do is they could do a Starbucks style digital wallet they’ve got you know payment information stored for 240 million Americans,
it’s so they could make it super low friction to use that storage in for me that’s that stored information.
By showing a barcode on the Amazon mobile app as you go through the cashier and that as they do in the Amazon bookstore for example.
So adding that digital wallet that that links to the payment information you already have them fight with Amazon would be a super easy step.
The the Go stuff like obviously this is a place where they could ultimately leverage it or deploy it but your point you know I think it’s a ways away and I think.
That the traditional Whole Foods layout is not going to wind it is not going to be the easiest environment to deploy Amazon go in so I don’t think that’s something we’ll see you in the.

[19:40] In the early days but I could certainly imagine that grocery shopping is a whole new reason to have the Amazon app on your your phone and to Leverage.
Mobile payments maybe as part of getting you know.
Some some from them benefit for checking out right like it essentially Amazon is the world’s greatest customer Affinity program and they could bring that to Whole Foods now.

Scot:
[20:03] Yeah and I haven’t had a chance to talk about on the show but they are released this new payment system called Prime reload.
That that’s pretty nursing so the way that works is minor standing is there they’re trying to get people to use Bank transfers instead of credit cards credit cards have a 2% fee Bank transfers are,
are very very inexpensive for merchants so the the way it would work is almost like a Starbucks card where do you load a tax dollars on to it at a time draw it down and then you get 2% cash back because Amazon’s no longer you know having to fund that credit card transaction,
that seems pretty you know applying that to grocery is pretty exciting I’ve never seen our true percent back kind of program like that and grocery do you think that would be a natural one to kind of play out here.

Jason:
[20:48] It absolutely could it’s interesting like you know we’ve all been surprised.
That is taken Amazon that long in this particular case cuz that’s a huge savings for them again all these customers have that stuff store they have a high level of trust with a customer like all the normal impediments that you would think we keep you from.
From aggressively shifting customers to to those electronic fund transfers instead of the credit card interchange transfers.
It’s surprising it’s that it’s taken Amazon that long so so certainly now that they’ve done it you can expect them to leverage it in these doors one when nuance.
Our friends at the credit card company that are pretty clever and they usually build into their terms of service that have you want to accept their cards you have to promise to give their cards equal weight and equal billing with all other payment methods and so.
Like very often it’s against,
it is is potentially against the terms of service agreement you have with Visa or Amex to offer electronic funds transfers for 2% less,
and that’s why most retailers don’t do that but you can imagine that Amazon at this point has enough volume that they have the leverage in their negotiation and you know it may be that we had to wait this long for the future and Amazon because,
it took this long for them to negotiate new new terms and conditions with a credit card companies that allow them to do this.

Scot:
[22:11] I always heard you couldn’t explicitly charge more for credit cards and but I thought maybe they were being sneaky by charging last bit sounds like you think that.

Jason:
[22:19] So there’s consumer protections about charging more right into that can literally be a criminal offence but the,
the charging less is is certainly not illegal but again the you know Visa you know knows that you need to accept Visa in so they can say,
hey as part of your agreement for accepting Visa you have to promise not to make these other vehicles cheaper.

Scot:
[22:42] Cool another area that kind of popped my mind when this was announced this because I did that Amazon scaper I took all their brands and put them onto one.
One chart.
Your folks are listening in her haven’t seen that yet it said Billy Billy Amazon skateball one word and it’s funny I set down to do that and then I just like started working on.
I thought okay I’ll have to have an area for all their retail offering so I’ll Prime now and all that on there and then.
You know this that the other and that’s like I’ll do the private label stuff now and I thought okay obviously have Amazon Basics and then as I started to kind of go through all the times that I.
Founding Father folks talking about different.
Private labels there’s like 50 private labels at Amazon and a lot of the newest ones are in this kind of grocery category you have wickedly Prime some of them are prime exclusive some aren’t.
You could talk about Mama Bear and then another interesting thing I didn’t know about Whole Foods I’m not a huge Whole Foods Shopper they have a very large private label called everyday 6365,
so so another really interesting thing here is Amazon has to pass here they can put their private label stuff into Whole Foods and then they could also.
But the everyday.
365 for sale on Amazon and Prime now and fresh and where were all these different mechanisms using private label factored into this at all.

Jason:
[24:09] I do I think you nailed it like there’s a bunch of synergies what will be interesting there is,
will the brands get equal-weight like like so the the whole food brands have,
probably better consumer recognition today and you mentioned Eglin 365 everyday but there’s also this like whole trade and engine to a number of these brands that whole food Shoppers are familiar with will be super,
easy to imagine seeing those on Amazon the bigger question is brands that are brand new to Amazon that Amazon’s just investing in like happy belly right for nuts and almonds do they keep investing in that or do they you know.
Or is there an overlapping 365 degree at the n65 everyday nut pack and they they just adopt the,
the whole food one or you know do they take 365 brand and use it for all the Amazon food like they’re there lots of permissions I can play out it’s going to be interesting to watch but,
I would definitely imagine that that private label was another valued aspect of the Steal.

Scot:
[25:11] Yeah then come expanding from private label out of ring know Amazon has had a lot of,
water brands just in general but I’m sure in the cpg category that don’t want to sell their one of the most popular or the most.
Popular ones we heard about his Honest Company and I would just just out Jessica Alba’s company wouldn’t sell on Amazon so then Amazon created their own diaper line and some his other things some of that worked Amazon elements in some of the Denton but Amazon seems really want that kind of product,
imagine that this gives Amazon just another kind of hammer to say to brands well you know we’re going to kick you out a Whole Foods unless you sell your whole assortment at all the Amazon offerings so so there’s also kind of an interesting selection angle there do you think that’s going to happen.

Jason:
[25:58] Very well could and don’t forget Whole Foods is an incubator for a lot of those socially-conscious products oh.
You know that they have a model where like individual entrepreneurs can pitch Whole Foods and Whole Foods might put you in one store or one market and you know if it does well there you could eventually expand to,
to their National footprint in so they have this great system for onboarding those Brands like really early in their life and now you know it just.
The.
The final win isn’t getting in the 460 Whole Food stores it potentially is you know getting on the Amazon platform and and reaching turning 40 million customers so.
So I absolutely think that that that Amazon will use the Whole Foods leverage with some of these brands.
You know to get more of the more the brands they want info in front of more of the customers they want there’s also an interesting one one of the most successful private labels out there is the Costco brand Kirkland Anna a fun fact,
Amazon sells more Kirkland online then Costco does.

[27:06] So they’re the biggest distributor the third largest retailer was Jet and after the Walmart jet acquisition jet is actually phasing-out Kirkland off the site and so.
Now really interesting thing and you know this is highly speculative but.
Could Amazon double down on the Kirkland relationship like could they ever have smaller packs of the Kirkland products in Arnhem propria for club and start selling through Whole Foods.

Scot:
[27:37] Who who initiated that stoppage at Walmart was at Costco or Walmart who said no mas.

Jason:
[27:45] Minor standing is that it was that it’s a Walmart decision to buy Walmart I assume that’s Mark Laurie but but to phase out cuz obviously Sam’s.
Gladden and Costco are direct competitors.

[27:59] Now course is you know Jets also a Marketplace so I’m sure there’s still going to be 3p sellers of that stuff.

Scot:
[28:06] Yeah II.
Two kind of specular things about that position I wanted it seems kind of silly to me but I just want to bounce Matthew one was will surely they’ll close the stores and just convert him into fulfillment centers that doesn’t make sense to me because,
you know these stores are chosen to be in high traffic retail areas that’s not where you would both of them the sooner that you can ommix don’t work.
So this was like some of the folks saying this for like clearly you know it.
It wouldn’t even have like pick up there just be a fulfillment that seems kind of silly to me into the second one was some way to leverage the third party system in Amazon and liquid doesn’t make sense in that world is.
Yeah the pricing the stuff of filming is really really hard with a physical footprint of the 3p model doesn’t really work and physical.
So that down didn’t really resonate with me either maybe there’s some things like with some certain.
Yeah maybe like some Farm kind of stuff could be almost like 3p also what I’m more of a commission kind of a thing to help with margins or something but I don’t know that down didn’t make a ton of sense for me either how do you feel.

Jason:
[29:12] So there and I don’t know Whole Foods does much of this but there is a sort of the analogous thing in Martin to 3p would be sort of consignment sales in,
In-N-Out breaking water into their you know there are some grocery that would,
try a product on consignment but I don’t see that as a big play if they were going to be a big three pleat 3p play it would be some kind of in whistle experience in Whole Foods right like so if you’re,
shopping the vitamin assortment at Whole Foods and they don’t have what you want like.
That you know there’s a kiosk in there and you know could that now have the entire.
Assortment of Amazon and including all the 3p Sellers and you know could be there be some incentive to ship that that product to the store that’s better than shipping it to home who knows right.

[29:58] But you can see it you can imagine a play like that potentially coming in for sure agree with you there’s no way they just bought these two for the real estate to convert to fulfillment centers I think the smarter people are talking about,
could it be a store and NFC not could it be exclusively NFC.

Scot:
[30:14] Yeah even then I mean the Whole Foods I’ve been in there too pretty jam-packed of people and product it’s hard to kind of see him cut enough cutting out much so that for fulfillment center but we’ll have to see.

Jason:
[30:25] No the only way that that works is if there are categories and whole foods that are losers in the Amazon decides to get out of.

Scot:
[30:31] Yeah definition so.
If you projectus forward do you think that Colin is right and we’re going to see Amazon kind as a top three grocery player in like in and let’s start to kind of move the chess board around what.
What happens to SAS mean does Walmart take a run at this does Walmart do anything differently it seems like they’ve kind of place their Bets with the jet acquisition and and Lori and and some things are doing their densities traditional Grocers react United know you’ve talked on the show about cougars actually,
pretty Innovative and thinking about some different formats and things would tell us going to what you think the three-year chessboard looks like on this.

Jason:
[31:15] Yeah so I think this is a giant new piece of pressure on that market that’s going to fragment,
the traditional grocery market right in there will be a few survivors like hard to imagine grocery is a winner-take-all thing where there’s one one National provider,
but you know they’re going to be a few survivors and it’s again that long tail of grocery rain that we have right now is likely to go away as all those small players aren’t able to compete and so,
the young we do projections in the show all the time so I’ll throw out some silly ones.
I think Walmart is making big bets in the space and is likely to be one of the winners I certainly think Amazon is one of the big three and then the big question about who the turtle in is is,
if it’s the big and comment that’s able to survive and hang on and that would be Kroger or if it’s one of these new market entrance that’s like all the yearly told it that that takes that third spot,
but I would definitely say net net this this was a really bad day at Kroger this was a really bad day at Target you know those guys were already buckling down the hatches cuz they you know they had all this grocery competition coming in the market and you know the last thing you needed is,
the world’s most disruptive retailer you know dropping dropping 13 billion dollars in your category.

Scot:
[32:44] Yeah that’s a good Segway into kind of the next segment that I call who wins and who loses so if we think about the winners I think kind of obvious ones or Amazon one today I think their market cap went up much more than what they’re paying here so effectively.

[32:59] Market cap accretive Whole Foods obviously this is a great win for them they get to keep the brand that get to keep the CEO of therein,
this like this by the best outcome for them I think they’re another one and all kind of say this now and we’ll talk about it a little bit later I think consumers when I think you know they’re there hasn’t been Innovation grocery.
For forever you know we we go to the speech place there’s a an IGA there which used to be if I know more and I do like a.
Was it starts of the day you have this old timey grocery store you go in there and it’s no different than our Kroger or a Food Lion or Harris Teeter or or anything like that so there really hasn’t been.
Tremendous innovation in this category and I think consumers going to win cuz you’re going to have more choice and.
Amazon is going to come in and really create amazing customer experiences which is what they’re really known for and their lower prices sets I think you know as a prime user I’m excited you know.

[33:56] I may actually start going to Whole Foods more if I can check out faster or there’s some really compelling reason to get me in there to do more stuff any winners that I didn’t say anything.
Think about.

Jason:
[34:08] Yeah I know I do think those are the big Winners I got you know I think there’s potentially some secondary winners are some of those brands that suddenly get exposure to a lot more more.

[34:22] Potential consumer so some of those those like Whole Food suppliers that could send them now you know.
Yeah have a much more prominent president positioning on the Amazon the.

[34:37] You know again it’ll be interesting to see what they do for delivery there you know could be some some winners there in terms of better delivery options and you know I think that’s going to be a pretty.
Easy Segway to who the losers are right.

Scot:
[34:51] Yeah and I almost said suppliers but then kind of some of the things I’ve read kind of say that those suppliers have had a really easy whole time with all foods that they don’t really put pressure on them at all and I think those days are over so so they,
it may be let’s put them on the fence so and I think they win with more distribution but I think they’re going to lose with getting kind of the the cram down here that they’ve avoided for probably 10 years.

Jason:
[35:17] Yeah although I would argue sometimes those forced to sturdy measures aren’t fun and don’t feel good but they’re not necessarily bad for you.

Scot:
[35:25] I’m sure we asked the brand that would disagree with you.

[35:29] I sold create a third category winners losers and kind of on the fence and put the suppliers in there,
let’s go to the losers so yeah you hinted about it earlier Whole Foods had a relationship with instacart and,
I know that they were an investor in instacart and I don’t know if this is rolled out at every store but I think it was it was pretty close and you know,
all the dish been in the data out there about the scale of this but instacart was the delivery partner and I can’t really see him as on keeping that at all because they already have this Flex thing Amazon likes to vertically in a great whenever they can so it feels like instacart is you know,
Banda on the short block for getting kicked out of that it is that you agree and in do you have any more information on that program.

Jason:
[36:17] Yeah I don’t have any more information instacart wasn’t in every Whole Foods in and their relationship with slightly different in different markets the level of integration that they had with Whole Foods for example I think there’s some pilot markets where the.
For the integration was very deep the and I think they are certainly a loser,
I would almost say that there the amount they lost today is slightly overblown cuz everyone talks about oh man there this 3 billion dollar valuation company that you know suddenly,
is going to go away and I guess I would argue that I don’t think they had a sustainable business model yesterday right like an.
Not creative data path to profitability you know they mainly exist existed to augment capabilities that retailers should have had natively and and you know.
Would probably going to have needed we at some point and so I’m not sure if they had a super viable business model other than 2.
Keep taking more VC money to subsidize the cost of delivery and so I think you know their problem was true yesterday they just probably have a lot less Runway to discover that that’s their problem today.

Scot:
[37:28] So they’re winners in the Jason world short where austerity is good.
Can tell you haven’t been an option or Jason.

Jason:
[37:37] I resemble that remark but.

Scot:
[37:40] You been on the short into one of those new Cycles.

Jason:
[37:43] Oh I’ve been on the the business end of Walmart Bender negotiations many times.

[37:50] But yeah I think is this definitely going to affect instacart but you know again I don’t think instacart was on some path to a Rosy future before this.

Scot:
[38:03] Glad I noticed you and I were both mentioned talk to about getting a quote to a reporter and were in that and you mentioned Target what is being pretty heavily impacted talk us to your logic there.

Jason:
[38:16] Yeah what’s up there not a traditional grocery store but that was one of their growth strategies right and so big part of their growth strategies these five signature categories and one of those signature categories is called Wellness.
And a big part of Wellness was organic organic food and health food and so won’t Target who made a major investment in.
Upping their presence in that that market like they do have Grocery and they they’ve tried to use grocery to drive incremental trips and they haven’t been super successful and so again they were one of these guys that were like.
Shoot we’re trying to win on organic fresh when weedles coming into the market that doesn’t feel very good and then you know to have.
Amazon partner up with with Whole Foods you know really makes it less likely that that.
The target is going to win by by having these these Wellness food products in their stores and then you know we’re not talking about alone on this show,
Walmart also had an acquisition today of bonobos and that you know.
That is probably not not favorable to to Target either and so Target just looks like there.
They’re standing still in a world where there their traditional competitors are all making you know pretty seismic leaps forward and so that that just can’t feel very good at Target today.

Scot:
[39:38] Yeah I didn’t know it but one of the Wall Street notes eyes I saw today said Target Outsource some of the Pharma stuff to CVS and their idea was Target should just Outsource this whole grocery kind of experiment to a Kroger or or someone just so you like actively get out of it ASAP you think that’s a viable strategy for Target.

Jason:
[39:59] It is possible like so again if you know grocery is super thin margins anyway and so if you’re not built for those margins like you’re using it for traffic and you’re losing money so if there’s someone else that’s willing to take that over for you and you still get the benefit of that traffic and you don’t have any of the risk of of the losses.
You can imagine that that being the case in.
In the health case you know Target tried to run their own pharmacies and in weren’t super successful so Outsourcing them you know,
what was probably not on the world’s most favorable terms to Target and you know I suspect that would also be the case if they had to have Source grocery at this point.

Scot:
[40:38] How many Target stores have groceries do you do tobacco.

Jason:
[40:42] I do not know.

Scot:
[40:43] And then you know how big it is for them isn’t like 5% temperature 20%.

Jason:
[40:49] I also don’t know that so I will refrain from taking a guess.

Scot:
[40:54] Ducks about Kroger are they they definitely were a market cap loser today I think you know one interesting thing is if you add up the market cap from the grocery kind of category 40 billion dollars was lost today so so so not only did Amazon ad,
you know plus.
Stop about 20 billion to their market cap that they took away 40 out of the market so kind of a positive swing for Amazon of 60 billion there and quiver was one of the,
biggest losers in this just from one day Wall Street think so but what kind of more should TJ do you think Kroger is in this puts them in a tough spot.
With the same kind of logical Aldi Lidl coming in and now you have this other kind of unknown player.

Jason:
[41:36] Yeah cuz I got that you know they were one of the largest traditional players in the space and that you know there they were.
Under Siege from Walmart and ALDI and Lidl and you know you could really look at what all the illegal do and say man there,
they’re incrementally better than how we’ve traditionally done it in the US and so they’re going to be a formidable competitor but.
Amazon is likely going to be an exponential disrupt or not an incremental one,
and so that’s that’s a lot more pressure on Kroger like Kroger certainly has made some strides in the last year 2 in digital and they’ve rolled out.
Quick List which is their version of Quicken correct in like 3 or 4 hundred stores and you know by all accounts it’s been wildly successful but those initiatives what really good in a space when no one was making any digital progress and so you you kind of got to look like the most Progressive of the,
the traditional players and now suddenly you Dome,
you don’t want that Progressive and so that that you know that’s going to be tough at Kroger that’s a formidable new competitor in in the space and they’re the incumbent.

Scot:
[42:47] When I was surprised at for Milwaukee respectables Costco I think last I looked they were down about 10% or so yeah the.
I just don’t think of them as grocery because you know your.
If you think about the layout of that store maybe a quarter of it is grocery but but clearly I must be missing something what what is this cause for them.

Jason:
[43:11] Yeah so you know that this gets into the definition of grocery right like so what,
what percentage of their products are at risk there the least digital company on the planet right like there,
executives are still talking about how we don’t really want to encourage people to go online because we’d way rather than come to the store and you know there,
there you’ll be easy to make fun of them were it not for the fact that they’re wildly successful.
So you know to put things in perspective Walmart’s the largest retailer in the US largest retailer in the world woman has 4,000 stores Costco’s the second largest retailer in the US they have 727 stores.

[43:53] So they’re there that you know they’re doing well and they have a formula that works well for their their customers.
You know they sell products that are now going to be in competition with Whole Foods Amazon Amazon going to make Whole Foods better and that you know that like just has to have some effect on Costco what is interesting.
Yo Costco probably does not look at Whole Foods is a direct competitor right like both from from the the products that.
Are high velocity in both both stores are very different and the size of the packs are dramatically different as well and so the the Costco assortment looks a lot closer like Costco grocery products with a lot more like.
Amazon grocery products in terms of being cost-efficient to ship right like you want to ship the 36 pack of toilet paper not the 4 pack of toilet paper.

[44:48] So you know it’ll be a little interesting if the combination of Amazon in Whole Foods means that more of those packs are available to more more Whole Foods customers but.
But I think.
At this point like I don’t think this is a game changer for Costco it’s just you know another aggressive competitor trying to seek wallet share.

Scot:
[45:10] Yeah and then the big ones Walmart so in the Amazon deep dive we did pretty early on to remember that was owed on that one.

Jason:
[45:18] I don’t you should have prep me for the show we should have like rehearsal or something.

Scot:
[45:23] This what happens when I do a hot take so anyway we did this episode called Amazon Deep dive will have put it in the show note so you can find it a little bit easier he was one of our first 10 episodes or so in there we talked about.

Jason:
[45:38] Episode 24 Amazon Deep dive.

Scot:
[45:40] Oh yes I remember it so well and one of the things you and I talked a lot about is the fact that when you just look at Amazon.
Revenue numbers it’s like 160 million for this year as was projected,
but inside of there is that third-party DMV which I think you have to kind of unpack,
so one of the things I like to do is say if you take Amazon one p and 3p for this year you actually get up to 300 billion dollars and then now we’re going to layer in 16,
from Whole Foods so you really have a 2017 Amazon that could.

[46:16] If this deal goes through it again this kind of enough they won’t get the benefit of a whole year but think of run rates Dow BS 316 billion dollar kind of Revenue run rate company.
Walmart estimated revenue for this year is 485 so Walmart is still considerably bigger than the.
Find energy of Amazon in Whole Foods but number one if you take grocery out.
Amazon’s already bigger than Walmart in the number to the disparity of the growth rates is about 20%.
And the kind of project that out not too far I think it’s like two and a half years then with this acquisition Amazon.
Could be bigger than Walmart all in including grocery by you know call it 2020.com so that that’s.
Pretty amazing and that that assumes there’s no other big acquisition no what if what if I don’t know what else is buyable out there from from that standpoint,
it seems like some of these things are almost unbuyable like a Kroger I don’t think either Walmart or Amazon could buy that or and it sounds like Trader Joe’s and so he’s other International ones are so big internationally that they can’t be acquired so but even without an acquisition I think the.

[47:28] We are going to see Amazon has a shot at being bigger than Walmart by 2020 if my math holds up so is Walmart Loser on this or you know I think it’s kind of overblown with what’s your take on this.

Jason:
[47:40] Yeah I think in the short-term like again nobody likes seeing their competitors get better I’m sure Wal-Mart looked at Amazon as as.
Like their most significant competitor and so then to see them enter a space that Walmart’s enjoyed a lot of success and then Amazon hasn’t had a lot of success in.
Like that you know that I’m sure nobody’s thrilled that that’s happening at Walmart I do think they’re well-positioned to be one of the survivors so if you if you look at this move in the long run and say oh this is going to force a lot more.
Industry consolidation and only the people that are able to adapt an offer good digital experiences to their customers are going to survive and you know only people that able to offer like really good products at really good prices.
And with all these good digital touch points are going to survive you know Walmart has the resources to do all those things but remains to be seen whether they will or not.
A lot of these other retailers don’t and so like well I’m sure in the short run this isn’t favorable and you know I think.
They made an acquisition today and they probably would have liked a happy new cycle about.
I have Progressive they’re being in digital and making great progress and buying you know increasingly bigger bigger and more profitable digital companies and I think that that news I got totally obliterated by.
By this much bigger acquisition that that Amazon did so you know I’m sure in the short run that that didn’t feel good.

[49:01] But yeah I think what we are setting up is going to be the Epic retail Battle of our careers which is.
You know going to be this this Amazon vs Walmart.

Scot:
[49:13] Anyone else we’ve left off the loser list so just a couple of throw out there I saw in the stock Recaps SVU gets mentioned a lot and I guess that’s super value but they seem to be,
I’m kind of micro cap on this I’m not sure what’s going on with those guys.
But they were down like 16% and almost feel like something else caused it and then a couple I thought about are some of these pure digital folks that are kind of tangential to this space Blue Apron box,
any any thoughts around those guys or any other folks you think her potential losers from this do.

Jason:
[49:48] Yeah I don’t know that those are like I think of anything their acquisition prospects may have just got in a little kiss right like because.
Again Amazon is going to do more Progressive things more quickly than the grocery retailers are used to doing and so even in an Amazon doesn’t do any Acquisitions and they build all these features out organic.
The the other significant retailers are going to need to make Acquisitions to keep Pace with Amazon right and so you could imagine.
Amazon launching you know their own meal service and that making Blue Apron look like more of an acquisition Target now you know they’re going through a IPO right now so.
So you know I don’t I don’t know how that complicates all that but you could certainly imagine.
You know box being a box acquisition being a defensive play to stay in the digital realm in competition with with Amazon with the you know Prime Pantry type type experience.

Scot:
[50:44] Crinkle one area that I saw that was interesting and I kind of.
Talked about of the top the show is there’s a couple articles out there saying that this is going to trigger this huge antitrust kind of thing and,
it is weird angle they all took was there worried about job is being cut at Whole Foods that’s not really any choices about any trust as more about will consumers be harmed and I just don’t think yeah sure Amazon’s really big but Amazon is like.
Not even a player in grocery or.
Physical retail if if Aldi Commerce is 10% and Amazon is a third of that 10% and that’s being generous if you unpack the DMV most people don’t need to do that so maybe they would say 25% of that 10 billion.
Microscopic thing and it doesn’t feel like there’s some Monopoly being built here and even.
Even then they’ll be like number 5 and groceries so do you think there’s antitrust risk your.

Jason:
[51:40] Yeah well so I should caviar this by saying that every single lawsuit I’ve been in for antitrust with a doj I’ve lost.
So so so take my opinion with a grain of salt but that that being said I don’t think this is an antitrust issue I don’t even think they’re going to look at it that hard because it is the space is just too wildly fragmented you know.
You like from that you know most of the,
the buzz and the the disruption in the fear about this is not liked by looking at the numbers and adding them up it’s.
By Young speculating about the the strength and skill sets of of Amazon being applied to this new category in the more serious way and you know the doj is not going to have an opinion on that they’re just going to look at it and say.
That just doesn’t fundamentally you know a road choice for consumers and you know therefore be bad for consumers.

Scot:
[52:34] Awesome those were the the big kind of points I wanted to hit on this hot take anything else you wanted an.

Jason:
[52:40] Well it’s you talked about some of the market cap losers I was I took a quick look at it Walmart’s market cap and it seems like they’re down exactly 13 billion dollars which would have been enough for this acquisition.

[52:53] So like here’s a crazy question like since people could still bid on this like.
Couldn’t couldn’t form Walmart step into this the the bidding like I don’t feel Whole Foods would be near as valuable to Walmart as it as it is to tie Amazon but could they do it as a defensive market cap play or is that all likely to.
To settle out and not be.

Scot:
[53:14] Yeah market cap it doesn’t actually give you dollars to spend on something sensible apples and oranges so you know their challenge probably would be.
I think they have enough cash I think their challenge would be the creativeness of it you know Walmart is held to a very pristine EPS number and if that changes our goes down that has a much more dramatic impact on their stock than anything,
so sorry I almost think that that would be a problem and you know so so I don’t know.

[53:50] I don’t think that would drive it if they want to do it it’s going to be up crap we got to kind of get in here and keep this a set from Amazon kind of thinking yeah I think the I think they.
I think if they actually won it would actually hurt their stock worse than what you seen because my guess would be they would have to lower their numbers pretty effectively and you know the thing is I don’t think Walmart knows how to go.
Whole Foods office their playbook doesn’t really work in his whole different customer but but you know so I think they’re going to have to your list let’s pretend they want it they ended up spending.

[54:24] 17 billion dollars I think that’s going to be diluted and.
In the way Walmart get Side by Wall Street. Gets Amplified almost by like a thousand so I think they would actually lose like 60 billion of market cap or something pretty substantial if they had to come out with a pretty deleted Acquisitions or weird way,
we were played those board games where you can come like getting a 3-way trap I feel like Walmart may be a little bit of a three-way trap here if they really think through them plication of of.
Of this site if you’re Amazon you may actually be okay for them to go but by this and spend more and it’s kind of like a win-win for Amazon.

Jason:
[55:01] Very interesting okay well Scott I have enjoyed ripping with you on the exciting news for today.

Scot:
[55:10] Yeah yeah we appreciate you guys,
coming in for the hot take and hope you don’t mind a little bit of extra Jason Scott show this week so we will be keeping track of this as it develops at you know where your go-to source for e-commerce news,
and this is something we’ll be watching very closely.

Jason:
[55:28] Yep and if you have any thoughts about the news or feedback about the show we’d love to hear from you on Facebook and if you enjoyed the episode feel free to write us a review on iTunes until next time happy commercing.