Janus Henderson: Positive on the Amazon deal: retail disruption accelerates

Amazon is a key long-term holding in the Global Technology Strategy, being the leader in two large, rapidly growing and underpenetrated global markets – e-commerce and cloud infrastructure. Broadly speaking, we are positive on the acquisition of Whole Foods as it fits with our thesis of Amazon being the winner in online retail. While we believe the deal will be accretive in the short term, the main reason for  our positivity is based on the fact that the deal will accelerate the company’s ability to disrupt the overall retail landscape.

 A good fit

Amazon has clearly stated that it wants to capture more market share of overall retail spending; being able to target the $800bn US grocery market is central to that goal.  Amazon has been experimenting with AmazonFresh and grocery delivery for some time (including a partnership with Morrison’s in the UK), and it has become clear that the company’s current distribution and supply chain is not able to achieve the scale in grocery as well as other retail areas.

 As an example, for perishables refrigeration is key and consumers often want to self-select. We expected Amazon to be raising capital expenditure over the next five years to build out its infrastructure for grocery; the acquisition will accelerate this with Whole Foods having already spent more than $2.5bn on capital expenditure since 2013. So while it may seem odd that a company that started off as disrupting ‘offline’ is now buying a bricks and mortar business, it fits with the key pillars of Amazon’s culture ie customer obsession, a long-term focus, invention and  operational excellence.

 Our constructive view on the acquisition is supported by the following complementary factors: 

 • Whole Foods has 465 stores in the US and UK but has been struggling with the productivity levels of those stores. Ultimately, Amazon should be able to leverage its affinity-loyalty programme, Prime, and improve store productivity by adding non-food goods (eg Amazon Echo and Kindle) and also deliver to store. Amazon’s vast customer database could also help improve sales by targeting offers and deliveries to customers.  

• Amazon has been testing the self-checkout 'Amazon Go' store, which uses sensors and cameras – innovation in bricks and mortar stores like this could bring powerful efficiency gains. Likewise, the acquisition of Kiva robots aims to help with store restocking. Both of these areas are very nascent for Amazon and the company is still working out how to optimise these technologies to improve efficiencies over the long term.  

 • Whole Foods also has a private label food and consumer goods offering, which Amazon will be able to add to its distribution base and is also likely to be disruptive to packaged goods companies over the longer term.  

Survival of the fittest

Technology continues to take share from the old economy, be it advertising dollars or travel bookings moving online; groceries are now being disrupted in the way that the non-food sector has over the last ten years. US retailing giant Wal-Mart has responded to the threat more actively in the last year, acquiring web retailer jet.com and online clothing store Bonobos. However, in the fight for grocery dollars, it may prove too little too late for rivals such as Wal-Mart, which is also facing increasing competition in the US from discount players such as Germany’s Aldi and Lidl.