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Amazon Strikes a Blow at Rivals with Whole Foods Price Cuts

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Amazon.com, Inc. (AMZN - Free Report) wasted no time after the Federal Trade Commission (FTC) approved its acquisition of Whole Foods and initiated reorganization. Its first move in this regard was one that the company is famous for – price cuts.

The retail highflyer announced on Thursday that the most awaited acquisition will close on Monday, Aug 28.

Amazon shares weren’t much affected by the news and dropped 0.58% at the end of the day’s trading. The stock has gained a noteworthy 27% year to date, significantly underperforming the industry’s gain of 49.6%.

Chain of Events

On Jun 16, the company announced that it has inked a definitive merger agreement to purchase Whole Foods Market for $13.7 billion or $42 per share in an all-cash transaction.

On Aug 15, the company announced a private offering of bonds aggregating $16 billion to fund the acquisition.

On Aug 23, the deal was granted approval by the FTC and Whole Foods’ shareholders.

Amazon.com, Inc. Net Income (TTM)

What Next?

Starting Monday, a selection of best-selling staples from Whole Foods will be sold at lower prices across all its stores, with more to be added going forward.

After certain technical integration, Amazon will link its Prime loyalty program with Whole Foods, offering members with special savings and other in-store benefits.

Amazon.com, AmazonFresh, Prime Now and Prime Pantry will sell Whole Foods’ private label products including Whole Foods Market, Whole Catch, Whole Paws and 365 Everyday Value.

Select Whole Foods Market stores will have Amazon Lockers to allow customers to get products shipped from Amazon.com to local Whole Foods Market stores where they can pick up or return them to Amazon.

This is just the beginning and we expect much more to come.

Should Retailers Hit the Panic Button?

The acquisition must have struck fear into the hearts of all retailers, the ones across the United States in particular. Grocery stores, operate under razor thin margins and thus are going to face extreme difficulty in coping with Amazon’s aggressive price cuts.

Amazon, on the other hand, has never hesitated to sacrifice margins to pursue its long-term objectives - bringing more customers under its umbrella and giving them reasons to stay. Since it generates significant cash from operations and holds a huge cash balance, management has the flexibility to take risks.

Amazon’s bold move will surely compel food and retail companies to revisit their strategies and prepare for more aggressive price wars. Shares of grocery giants Kroger (KR - Free Report) , SUPERVALU (SVU - Free Report) , Costco (COST - Free Report) , and Target (TGT) tumbled 8%, 6.6, 5% and 4%, respectively on Thursday.

Lesser popular chains such as Ingles Markets (IMKTA), Smart & Final Stores (SFS), Weis Markets (WMK) and Casey's General Stores (CASY) fell 3.5%, 2.8%, 2.1% and 1.9%, respectively.

Has Amazon Found a Way to Counter the Challenges?

The deal stands to disrupt the retail landscape by significantly expanding Amazon’s customer base. It opens up opportunities for Amazon to innovate with retail.

Amazon has been testing waters with innovations such as drive-in-grocery delivery service (AmazonFresh Pickup - order groceries online and collect them from a store nearby) and “cashier-less” stores (Amazon Go – the company’s first brick-and mortar grocery store). It has also added online and offline features to its bookstores.

Amazon might add those features to Whole Foods’ stores in the future. It has started to mindshare in the grocery space.

Notably, the deal opens up doors for Amazon to do a lot more with Prime. Prime saturation is apparent in the U.S. mainly because of its concentration in high-income households.

But now, with prices at Whole Foods lowered, Amazon is in a position to lure entirely new demographic segments (lower and middle-income group) to its loyalty program and generate increased sales. Prime members spend much more than non-Prime members and help in repeat sales of not just general merchandise but also media.

Currently. Amazon holds a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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