In a note to investors released after Amazon unveiled a $13.7bn deal to acquire Whole Foods on Friday, Bernstein analysts Alexia Howard and Matt Romariz explain: “The deal clearly has profound implications for the US branded packaged food companies that we cover.
"Most directly, the possibility that Amazon will begin to use the well-known 365 private label brand from The Whole Foods Market as a lynchpin of its food grocery offering is important.
“Clearly many of us had thought that any 'Amazon' branded foods would be shunned by consumers. But by acquiring Whole Foods, the 365 brand becomes instantly available as part of Amazon’s online offering. This brand is highly credible with consumers – indeed we had previously asked Whole Foods if they might consider selling the brand more broadly into other retail channels.
“At the time, the response was that the grocery chain considered the brand a pivotal differentiator for their brick and mortar grocery stores and therefore they would not be looking to expand distribution more broadly. However now, with Amazon in the driving seat, the game has clearly changed.”
Deal could trigger additional M&A
Meanwhile, the fact that food stocks fell on Friday following the news that Amazon had struck a $13.7bn deal to acquire Whole Foods Market, was hardly surprising, they claimed.
“The idea that a juggernaut company in the online retail space is clearly staking its turf in the private label world is game-changing…
“It's possible that this latest announcement could accelerate the consolidation that many feel is imperative in the US food space, as management teams capitulate in the face of ever increasing challenges, including the rise of new challenger food brands as barriers to entry collapse and consumers migrate to new products with cleaner labels and more credible social responsibility agendas.”
Will Amazon use the 365 brand as a focal point of its online food offering?
They added: “We are also seeing a new focus by retailers on edge of store products in the deli and fresh produce areas, as they follow the direction that many consumers are headed. At the margin, if this move makes the current US branded food players more likely to sell out to Kraft-Heinz, or catalyzes a reduction in stock prices that makes Kraft-Heinz more willing to engage with them, then this could be a good signal for Kraft-Heinz's acquisition prospects overall.
“As such, we are not surprised that many of our food names saw stock prices drop off on Friday, given the likelihood that Amazon will use the 365 brand as a focal point of its online food offering.”
On the flip side, private label manufacturers such as Treehouse Foods and SunOpta “are likely to be beneficiaries in volume terms, although as we saw in recent earnings results, even they are not immune to pricing pressure from incumbent brick and mortar players and could see some pushback on pricing from the online retailers as well,” said Howard and Romariz.
Big food looks more like big tobacco… without the pricing power
“Overall, this announcement simply serves to underline our bearish view of heavily-processed packaged food names in the US. These companies are increasingly looking like Tobacco without the pricing power, since there are so many choices evolving about how and what to eat.
“As barriers to entry across the space collapse, and as competition heats up from smaller brands and now increasingly from both brick and mortar and online retailers, their lack of exposure to more attractive markets overseas is likely to leave them up the creek without a paddle relative to other CPG sectors like HPP, beverages, European food names and tobacco companies.”
Get more reaction to the Amazon/Whole Foods deal HERE.
Read the letter that Whole Foods wrote to its customers about the deal.
Interested in how other grocery e-commerce players will react to the Amazon/Whole Foods deal? Check out our incredible lineup of speakers at FOOD VISION USA 2017 (Chicago, Nov 13-15), which includes PeaPod CMO Carrie Bienkowski.
