The Useful Acquisition….

If you have been sitting on the side lines wondering why Amazon, the behemoth internet retailer would go anywhere near a retail high supermarket chain like Whole Foods, you are not alone. You may be asking yourself is this for the new retail convenience store like outlets Amazon is working on? The ones where you walk in and walk out without ever speaking to a human because the purchase of goods is automated and just goes on your Amazon account. Nope. Sorry that is not the reason.   Or maybe you are thinking Amazon wants to use Whole Foods for its Fresh Direct concept.   Well that may be partially true but that is not the real reason. Not even close actually.

It is all based on numbers everyone.   Straight numbers. See if you look through Amazon’s financials and we will bet most of you have not, you will see something interesting.   With a gargantuan market cap you would think Amazon is a master of financial success. Think again. Even though approximately fifty percent (50%) of all goods bought online are purchased through Amazon, as a company its profit margins are miniscule.

Classified as a technology company Amazon gets compared to the likes of Microsoft, Facebook, Alphabet and of course Apple among others.   Each of those companies has profits from operations between twenty two percent (22%) and forty six percent (46%). But Amazon, with all of its glory and inflated stock price showed just over two percent (2%) as of March 31, 2017.   Surprised? Most people miss that little known detail.

So if you thought that Amazon was buying Wholefoods just for the food distribution, well you are mistaken. What normally happens with Amazon is it purchases companies with higher operating profit margins and uses the excess cash to fund its other development ventures.

Also keep in mind when running a public company the emphasis most especially for a tech company such as Amazon is eventually on earnings. In the acquisition of a company like Whole Foods that has just shy of a five percent (5%) operating profit margin, Amazon can add that too its earnings.   With the combination eliminating the need for certain jobs and expenses the additional profit boosts Amazon’s profit, while Amazon streamlines Whole Foods’ business and reduces their prices on goods.   The reduction in prices puts Amazon into a new market it was not in before while allowing it to do what it does best, disrupt.

This will create more competition on prices in the supermarket sector while increasing Amazon’s profit margin. With reduced prices, Whole Foods will garner more market share, which is what Amazon is best at. Selling products for less than other retailers or online stores do.   Add that prowess to the already well thought out distribution, cost reducing strategy and fulfillment of product and you have a winning combination for Amazon.

But make no mistake about it, the acquisition is not only to get a foot hold into the supermarket world, it also comes with a perk, increased cash flow and additional profit that will just fall to Amazon’s bottom line.

 

 

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