E-commerce biggie Amazon AMZN announced a hot all-cash $13.7 billion deal to acquire the natural and organic foods supermarket chain Whole Foods Market Inc. on June 16. The deal is expected to be sealed in the second half of this year. Reacting to this announcement, Whole Foods surged over 29% and Amazon shares nudged up over 2.4% on June 19.
Whole Foods’ decision to mingle with Amazon was not surprising altogether given its ongoing struggles. In second-quarter fiscal 2017, Whole Foods’ comps dropped for the seventh quarter in a row. Whole Foods also lowered its sales and earnings forecast for fiscal 2017, and guided comps decline of about 2.5% for the fiscal year.
Still, the company has a strong brand image and coverage of over 430 physical stores, which was probably liked by Amazon. Plus, Amazon perhaps needed a big name in the $800 billion grocery business to get a foothold in this promising segment. Amazon has always wanted to be in grocery segment for which it tried concepts like Amazon Fresh and Amazon Pantry. But “many options confused customers,” as per Bloomberg.
Once the acquisition ends, Amazon plans to lower prices at the premium grocer by automation, headcount reduction and inventory changes, as per the source. While "Amazonization" of Whole Foods boosted the concerned stocks and the related ETFs, there are some other corners of the investing world which were hurt by the announcement. Below we highlight the details.
Whole Foods Market stock has a Zacks Rank #3 (Hold) at the time of writing. Its Zacks Industry Rank is in the top 27% and has a VGM score of ‘B.’ So, investors can definitely play the stock at this moment. The stock has considerable exposure to the following ETFs, making those funds sloid plays at the current level (read: 4 Sector ETFs to Profit from if Geopolitics Rule).
The Organics ETF ORG
The fund looks to track companies globally that focus on naturally derived food and personal care items. Whole Foods Market takes the spot of the fund with about 22.2% share. The fund chares 50 bps in fees. It gained about 3.4% on June 16.
Deep Value ETF DVP
The underlying index of the fund – TWM Deep Value Index – is built on an objective, rules-based methodology that starts with an initial universe that reflects the companies listed on the S&P 500 Index. Here also, Whole Foods Market takes the first spot with 10.05% exposure. The fund charges 80 bps in fees. It gained about 1.5% on June 16.
Health & Wellness Thematic ETF BFIT
The index – the Indxx Global Health & Wellness Thematic Index – tracks the performance of companies in developed markets that offer products and services to promote physical wellness. Again, WFM takes the first position with about 3.6% share. BFIT was up about 0.4% on June 16.
Since the possibility of lower grocery prices is rife with this Amazon-Whole Foods deal, other grocery stores and supermarkets may experience pricing pressure and lose the competition. Investors have now started to apprehend that the gradual of death of brick-and mortar retailers thanks to the rise of online retailing, will be replayed on the supermarket scenario (read: 5 ETFs & Stocks: Silver Lining in Soft May Retail Sales).
As a result, big grocery and supermarket chains had a bloodbath on June 16 with Kroger KR sinking over 9.2%, Supervalu SVU dropping 14.4%, Costco COST falling about 7.2%, Sprouts Farmers Market Inc. SFM retreating 6.3%, United Natural Foods Inc. UNFI plunging about 11% and Wal-Mart Stores Inc. WMTlosing about 4.7% on June 16. Discount retailer Target Corporation TGTalso declined over 5% on the day, as per the source.
This can hurt ETFs like First Trust Nasdaq Retail ETF FTXD, PowerShares Dynamic Retail Portfolio ETF PMR,VanEck Vectors Retail ETF RTH and Consumer Staples Select Sector SPDR Fund XLP.
Though it is still unclear how the joint model will work, it may be something similar to the store, called Amazon Go, which is different from a typical Walmart or supermarket. Rather, it requires consumers to use an app called Amazon Go, to automatically include the products needed to be added to a digital shopping cart; and then simply exit without waiting long to check out, as per the source.
As per Bloomberg, payments’ companies like Square Inc. SQ, Vantiv Inc. VNTV and Blackhawk Network Holdings HAWK also lost about 1.8%, 3.8% and 3.2% on June 16 on worry that the Amazon deal will hurt “demand for traditional methods of paying for goods at checkout.” These stocks have decent exposure to PureFunds ISE Mobile Payments ETF IPAY, which can cause the ETF slight trouble (read: How to Invest in PayPal's Strong Q1 Results Via ETFs).
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