How the Amazon deal might affect Publix

LAKELAND – Take two queen bees and put them in the same hive, and what do you get?

A lot of buzz.

That characterizes the reaction to Friday’s announcement that Amazon, a leader in online retailing, is buying Whole Foods Market, a leading grocery chain in high-end organic and specialty foods, for $13.7 billion.

“Amazon and Whole Foods are the buzziest companies out there,” said Jon Springer, senior editor for Supermarket News based in New York City. “The combination has generated some outsized coverage.”

But Springer also agreed with those buzzing analysts who’ve predicted the proposed deal could lead to disruptive changes in U.S. supermarkets and e-commerce.

The merged company could become a much larger player in the supermarket sector, challenging all other chains, including Lakeland-based Publix Super Markets Inc., he said.

“I think it creates the prospect of Amazon becoming more significant in groceries,” Springer said.

The merger announcement came just nine days after Publix announced it would expand a pilot program with San Francisco-based Instacart to all 1,148 Publix stores in six states by 2020. Instacart takes online orders for Publix products, fulfills them through its own store-based shoppers and delivers the order to the customer’s home for a fee.

Amazon does much the same for a variety of consumer products. Until the Whole Foods announcement, Amazon dabbled with delivering food products, and the merger signals its intention to go all in with a wider range of grocery products from more than 460 Whole Foods outlets.

Amazon’s entry into the grocery market likely will spur Publix to speed up the Instacart alliance to all its stores, said Springer and David Livingston of DJL Research, a Wisconsin-based supermarket industry consultant who follows Publix.

Like Publix, Whole Foods contracted with Instacart for online sales, the analysts noted. It will likely cancel that contract and switch to Amazon’s delivery network, forcing Instacart to look elsewhere, such as Publix, to make up for lost sales.

“If Whole Foods drops Instacart and uses Amazon’s delivery network, Publix will be a much more important customer,” Livingston said. “I think it will speed (the expansion) up. Publix will want to be in the 2020s as soon as possible.”

While online sales currently account for just a couple of percentage points of total grocery sales, Amazon’s entry into the marketplace will likely accelerate the trend industrywide.

“It means grocers need to have some kind of offering in that e-commerce space,” Springer said. “That speaks well of Publix’s foresight in expanding use of Instacart.”

Brian West, a Publix spokesman, wouldn’t directly address whether the company would speed up its InstaCart expansion.

“Most products can be ordered online and delivered. Fresh and prepared foods are the challenge,” West said. “Our online ordering and delivery is trending, and our collaboration with Instacart is expanding to bring more convenience for our customers.”

One place where the Amazon deal might have an immediate impact is on the next valuation of Publix stock, due to be released Aug. 1. Publix stock is owned by current and former employees, including retirees, and is not publicly traded. Its value is set by a financial consultant based on the performance of a “peer group” of other supermarket chains with publicly traded stock. They are Ahold Delhaize, Kroger, Supervalu and Weis Markets.

Virtually every publicly traded supermarket stock, except for Whole Foods, took a hit following the Amazon announcement.

That’s “a little bit unusual,” Springer said, and it probably reflects investors’ concern about retail giant Amazon’s potential impact. Beginning with books and spreading to consumer electronics, Amazon has a reputation for disrupting existing markets.

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Kroger fell from $24.56 per share June 15 to $22.29 Friday after the announcement. Ahold fell from $20.65 to $18.99 per share, Supervalu from $3.76 to $3.22 and Weis from $50.92 to $48.50.

None of the four stocks had yet regained its pre-Amazon value at the close of trading Wednesday. Kroger closed at $22.37 per share, down 9 percent over the period; Ahold closed at $18.38, an 11 percent loss; Supervalu closed at $3.01, down 20 percent; and Weis at $47.53, nearly a 5 percent tumble.

But Springer cautioned that other factors might have affected the stock prices. Kroger in particular fell because it had just downgraded its financial performance for the rest of 2017, he said.

Livingston also cautioned against a simple correlation between current stock prices and the new Publix stock valuation.

“I have no idea what they plan to do,” said Livingston, referring to the financial consultants who will set the Publix stock price. “So many different factors can indicate how each company will perform. I don’t see the logic.”

West, the Publix spokesman, said the new valuation will be based on each stock’s performance for the entire month of July.

Clearly, stock prices could change up or down depending upon release of additional details about the merger agreement.

Some analysts noted another company could jump in before the deal closes and offer a higher price for Whole Foods shares. The Amazon offer represents paying Whole Foods investors $42 per share, a 27 percent premium on the stock price before the announcement.

The Whole Foods stock price closed at $43.26 per share Wednesday, indicating some investors expect a bidding war for the company.

If the Amazon/Whole Foods deal does go through, it could ignite a new wave of mergers and acquisitions in the supermarket industry, some analysts said.

Until now, Publix has based its growth strategy on expansion into new cities. Along the way, it purchased stores in those cities from other chains instead of building new stores, but it has not purchased entire companies.

Livingston and Springer said that’s still a viable strategy.

“Publix is pretty large already,” Springer said. “I don’t think it means they have to buy something right away, but they do have to get bigger.”

Smaller, regional chains would be more attractive acquisition targets, he added.

“It’s important to be big today because you might need the resources to devote to e-commerce,” Springer said. “The competitive difference between companies with a lot of resources and companies that don’t have as much resources is widening today, and e-commerce is one area where that’s happening.”

Livingston cautioned Publix against pursuing a more aggressive growth strategy.

“Publix is one of the country’s premier grocers,” he said. “Buying out another grocer means buying a lower-quality company and making their employees converts. They don’t need to do that. Publix has a very solid growth plan in place.”

Publix may even benefit by being cautious about expansion, Livingston said.

“Publix can sit back and watch other competitors get bigger by buying subpar grocers and going further into debt by doing it,” he said. “That plan has worked out quite nicely for Publix in the past.”

http://www.theledger.com/news/20170621/how-amazon-deal-might-affect-publix