Via online business online marketing online business opportunities 3 Reasons For Amazon To Reconsider Its Whole Foods Strategy

Via  online business  online marketing  online business opportunities 3 Reasons For Amazon To Reconsider Its Whole Foods Strategy

Via online business online marketing online business opportunities (NASDAQ:AMZN) has developed a reputation as a disruptive force in almost every industry it enters. In 2017, Amazon expanded its physical presence with its purchase of Whole Foods. At the time, grocery and retail stocks sagged in response, on the assumption that Amazon would take over the grocery business. However, the acquisition hasn’t been the rousing success that some pictured at the time. In truth, Amazon may need to accept a loss of the physical grocery battle in order to win the ultimate war for profits.

Via online business online marketing online business opportunitiesA whole lot of nothing

The purchase of Whole Foods was analyzed in anarticleby CNBC as, “Whole Foods gives Amazon the brick and mortar platform that many internet retailers have begun to realize is essential to minimizing the cost of returns, delivery and marketing.” Theoretically, Amazon would turn Whole Foods upside down, shake out costs, lower prices, and boost sales. The reality has been far less impactful.

via online business online marketing online business opportunities Whole Foods Free 2-hour delivery for Prime members

(Source: Whole Foodssite)

The key assumption that Amazon needs a physical presence seems misguided. It’s a different scenario forWalmart(NYSE:WMT), with its over 11,000 stores worldwide, to leverage its physical presence to increase online sales. Walmart locations are convenient, so shopping online and picking up at the store means near-immediate gratification.

This is not the same thing as Amazon acquiring Whole Foods. First, at last count, Whole Foodsoperatesjust under 500 locations between the U.S. and the United Kingdom. To put this in perspective, this means there are about 22 Walmart locations for every 1 Whole Foods. Second, if grocery delivery and pick-up were central reasons for Amazon to buy Whole Foods, the numbers seem to argue this is a fight even Amazon may not want to take on.

Whole Foods offers Prime Nowdeliveryin 66 cities and areas of the country at present. By point of comparison, Walmartoffersdelivery in 72 cities in Florida alone. The company said itplansto double the number of stores that offer grocery delivery in 2019 and add another 1,000 for grocery pickup. By 2020, Walmart expects to offer grocery pick-up at 3,100 stores and to have 1,600 delivery locations. Walmart already had billions invested in physical locations and it is simply leveraging its investment to expand online and grocery sales. Amazon’s purchase of Whole Foods gave it a physical presence, yet not the advantage of scale.

Second, Whole Foods didn’t get the nickname “whole paycheck” without reason. The company’s own website describes Whole Foods as, “the world’s leader in natural and organic foods.” The positioning of Whole Foods as an upscale organic grocer doesn’t seem to fit with Amazon’s customer first, price second culture. It’s difficult to mesh the sale of electronics like the Amazon Echo lineup, Kindles, and Fire devices alongside organic kale.

For those who doubt that Whole Foods has been a bit of a dud for Amazon, we only need to look at Amazon’s last earnings report.


Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Physical Store Revenue






(Source: Amazon mostrecent earnings)

Amazon’s physical store presence is primarily Whole Foods, and yet, sales look to be essentially flat for the last five quarters. During Amazon’s conference call, CFO Brian Olsavsky said, “Whole Foods growth year-over-year on an apples-to-apples basis was approximately 6%.” No matter how we cut it, Whole Foods is posting the slowest growth of Amazon’s divisions. In the meantime, the physical store business represents just 6% of the most recent quarterly sales. In addition, this isn’t the first time Amazon struggled to find footing in the grocery business. Amazon Fresh expanded then wasshut downin multiple cities with little explanation.

Amazonpaid$13.7 billion for Whole Foods in 2017. On a price-to-sales basis,Krogergenerated about $124 billion in sales over thelast four quarters, yet its market cap sits at about $23 billion. Using these numbers, investors are valuing the retailer at just $0.19 of market cap per $1 of revenue. I’m not suggesting Whole Foods and Kroger would fetch similar valuations. However, even at three times Kroger’s price-to-sales, Whole Foods would be valued just under $10 billion. The grocery business ismassiveyet, rife with competition and cutthroat margins.

Prior to its acquisition, Whole Foods’saleswere essentially flat and its comparable store sales were down nearly 2% annually. In the third quarter of 2017, the company reported in the 40 weeks prior, it generated just $209 million in core free cash flow. Looking at this another way, with over $12 billion in sales over 40 weeks, Whole Foods was generating less than $0.02 of free cash flow per $1 of revenue. It’s possible Amazon may have improved on Whole Foods operations, yet the company’s lackluster sales growth would suggest otherwise.

It might be time for Amazon to look at strategic alternatives for its physical stores division. Investors expect huge growth from Amazon and the company has several reasons to invest its time and money elsewhere.

Via online business online marketing online business opportunitiesThe shift to cash

One way to tell what a company is focused on is to look at what verbiage is at the beginning of its earnings announcements. For the last few years, Amazon has started its earnings release with almost the exact same cadence. The top line announced how fast sales increased year-over-year. The first paragraph starts with, “operating cash flow…” Amazon knows that investors want to know how quickly it grew sales, but immediately after that it is focused on cash flow.

The reason Amazon wants investors to focus on cash flow is because the company’s free cash flow picture is improving at a rapid rate. The reason isn’t hard to guess, its Amazon Web Services business. This division is growing fast and has significantly better margins than most of the company’s other businesses.


Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

AWS Sales







AWS Sales Growth (y-o-y)







(Source: AMZN current quarter earnings)

Last quarter, AWS operating margin exceeded 29%. By comparison, North America operating margin came in at just over 5%. Due in part to AWS growth and Amazon’s ability to control some of its costs, the company’s free cash flow has increased exponentially.

via online business online marketing online business opportunities Amazon Core Free Cash Flow per Dollar of Revenue

(Source: Trailing 12 Months Sales and FCF – Amazon current quarter earnings)

In short, Amazon’s core free cash flow per dollar of revenue has increased 60% versus 18 months ago. By point of comparison, Walmart’slast quartershowed free cash flow per $1 of revenue of $0.03, which matched the company’s cash flow performance last year at the same time.

I believe the Whole Foods venture may be pulling resources away from AWS to the detriment of the company and shareholders. When you have a division growing at over 40% annually and generating substantial margins, you don’t waste time and energy trying to grow another division that is limping along at 6% annual growth with much lower margins.

Via online business online marketing online business opportunitiesMore than half a reason to invest in this business

There have been many commercials produced by Amazon showing small business owners that sell their wares on Amazon. The one that sticks out in my mind is a lady who closes her shop at the end of the day. The sign doesn’t just say closed, it says something like “always open on Amazon.”

Amazon has long been decried as the bringer of doom to small businesses. When the company’s retail business was less mature, that was certainly the case, as the company tried to grow by undercutting everyone. As Amazon has become the de facto search engine for products to buy, the company realized it didn’t always need to be the seller for its business to grow. The CFO said on the last conference call, “more than half of our units sold are from third-party sellers.”

In the last year and a half, Amazon’s online store sales have increased by roughly 51%. By comparison, third-party seller services revenue has increased by nearly 70% in this same time frame. This is another phenomenon that Walmart is trying to take advantage of, offering third-party sellers the option to sell on its site as it grows and becomes more popular.

An interesting study found most third-party sellers are on Amazon as well as other sites. However, there seems to be a split between where sellers are going. In 2017, 65% ofsellers on Amazonsaid they would sell oneBayas well. By 2018, the number of Amazon sellers using eBay had dropped to 52%. Walmart seems to be gaining ground, as the number of Amazon sellers using either or moved from 17% in 2017, to 25% in 2018.

This is fast growth and high margin business. The company gets the benefit of revenue from services without some of the risks of carrying certain inventory. This is another significant business opportunity, and last quarter, it represented more than 300% of the sales of Amazon’s physical stores. Some investors may believe Amazon can do everything well at the same time. However, there is an opportunity cost in every business decision. Whole Foods seems to be an opportunity that could cost Amazon some focus on these third-party sellers.

Via online business online marketing online business opportunitiesA value play?

One of my core investing principals is growth at a reasonable cost. There is little doubt that Amazon has been giving investors heartburn with its valuation for quite a while. That being said, by a few metrics, I can honestly say that Amazon looks like a decent value at current prices.

First, using the PEG ratio, the comparison between Amazon and Walmart isn’t even close. Analysts are calling for a 5-year annual EPSgrowth ratefrom Amazon of nearly 44%. Looking at 2020 earnings estimates, Amazon shares trade for a forward P/E of about 41. This means Amazon sells for a forward PEG of less than 1. For most traditional stock pickers, anything less than 1 could be a good value.

At present, Walmart is projected togrow5-year EPS by just over 4% annually. Current estimates for next year put the stock at a P/E of over 21. Even with a yield of a little over 2%, it’s hard to get past a PEG ratio of 5.

Second, when it comes to revenue growth, the gap is nearly as wide between the two companies. Analysts expect revenue growth from Amazon of around 18% annually over 2019 and 2020. During this same time, Walmart analysts are looking for less than 3% annual revenue growth.

There have been numerous headlines suggesting that Walmart’s online business could present a problem for Amazon. This is a bit of hyperbole, given the difference in the size of online sales at the two companies. However, as we’ve seen, Amazon has multiple divisions that are growing fast and carry excellent margins (AWS and Third-Party). The company has a burgeoning advertising business as well that could be worthmany billionsin the years to come.

What Amazon doesn’t seem to need is Whole Foods. Having a physical presence is one thing if it is tied to a fast-growing business. However, Whole Foods isn’t growing fast, and its lack of scale seems to represent just another challenge for Amazon to try and overcome. Amazon’s massive opportunities in first-party eCommerce, Third-Party Services, AWS, and Advertising should warrant Amazon’s full attention. It’s time for the king of online to get back to its roots and drop its Whole Foods acquisition in the recycle bin.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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