The Deal of the Year

by Jason Norris, CFA
Executive Vice President of Research

The Week in Review

Stocks finished the week slightly higher, however the majority of sectors were in the red. While the S&P 500 rose about a quarter of one percent, Technology and Healthcare stocks were the only two sectors positive, rising 2.3 percent and 3.4 percent, respectively. Investors’ concerns over low rates and below-trend growth in the U.S. resulted in a focus on the two “growth” sectors. With roughly half of 2017 complete, the S&P 500 has already deliver double-digit gains.

The Deal of the Year

On Friday, June 16, Amazon and Whole Foods agreed to a deal in which Amazon would acquire Whole Foods for $13.7 billion. The reaction to the deal has been extremely positive for Amazon, with the stock increasing over $15 billion since the deal was announced. In essence, Amazon shareholders picked up Whole Foods for free. This exuberance was not seen in other grocers, such as Kroger, Target, Costco and Walmart. We now have a “Death by Amazon” index whose holdings lost over $32 billion in market value on Friday alone, as seen in the chart below. While investors are digesting all the speculation, we believe it is very premature to put the nail in coffin of the grocery business for Walmart and Kroger.

Although this deal is a big one, we don’t anticipate any major changes to Whole Foods in the near-to-medium term. When he addressed Whole Foods employees, CEO John Mackey said that this acquisition will “make a big difference in the food industry.” He did assure employees that that product quality, company benefits and salaries will remain the same, which is always a concern following a change in ownership. Whole Foods has always been focused on its employees and stakeholders, as highlighted in John Mackey’s insightful book, “Conscious Capitalism.” This contrasts with many media reports regarding Amazon’s employee culture in recent years. Time will tell how these very different companies will mix together.

Looking at the industry, we are taking a wait-and-see approach. Our sense is that this deal for CEO Jeff Bezos is an incubator for physical stores. Amazon has been in the “grocery” space since 1999 and only recently looked to establish physical locations. It currently generates over $6 billion in online grocery sales; however, only $1 billion of that would be considered “food retail.” Also, Whole Foods has delivery options in place due to its relationship with Instacart; therefore, this impact on food delivery is uncertain.

Walmart did take a shot across Amazon’s bow this week. The Wall Street Journal reported that Wal-Mart is “recommending” some of their suppliers not use Amazon Web Services*. There are four major players in this area in the U.S., Amazon (AWS) and Microsoft (Azure) lead the pack with Alphabet/Google and IBM in the distance. With Wal-Mart’s size and more and more companies moving to the cloud, it will be interesting see what effects if any, this has in the space.

Takeaways for the Week:

  • Growth continues to lead the market as low rates keep a lid on “Value” stocks
  • While the Whole Foods deal may be transformative, we believe the timeline will be a lot longer than the pundits expect

*Amazon Web Services is the cloud offering where companies will outsource their technology. See