Jeff Bezos just handed corporate America a $US50 billion question

NEW YORK CITY — If you needed any further proof that Amazon is shaking the US commercial landscape to its very core, look no further than last week.

Amazon’s $US13.7 billion deal for Whole Foods has had a ripple effect across sectors. The grocery industry, a $US800 billion addressable market in the US according to Goldman Sachs, has a low level of ecommerce penetration. That could be about to change. Traditional grocery store players like Kroger, Costco and Target saw their stocks get battered after the deal was announced.

The effects haven’t been contained to the grocery aisles, either. United Natural Foods, the primary distributor for Whole Foods, also took a hit. And the pharmaceutical supply chain took a big hit too.

Then, it emerged that Amazon could enter into a partnership with the world’s biggest athletic apparel brand, hitting the likes of Dick’s, Under Armour, and Foot Locker.

In short, Amazon is rapidly putting its stamp on industries far and wide. Capable of creating or erasing billions of dollars of market value with even the smallest action, the tech titan has investors and corporate employees alike shaking in their boots.

The rise of Amazon hints at a broader question that looms over executives in traditional consumer-facing industries. If a tech giant can in one fell swoop land a deal and emerge as a key player in an $US800 billion industry, what’s stopping a new entrant doing the same in my industry?

It’s been a while since we’ve seen such an aftershock from an M&A transaction,” said Marc-Anthony Hourihan, UBS’ cohead of M&A in the Americas. “These ripples seem to be going in much broader sectors.”

Amazon’s acquisition of Whole Foods, combined with reports that the company will start directly selling Nike products, has helped the tech giant add $US18 billion in market cap in the past week. In contrast, $US31 billion in competitor market cap has been wiped out in the same period.

Add to the two sums together and you have an almost $US50 billion gap.

Walmart and Costco have been hit the hardest, both losing more than $US8 billion in value since the Whole Foods deal was announced on June 16. Meanwhile, Whole Foods stock has been trading above Amazon’s offer of $US42 a share, signalling that investors believe a bidding war could emerge and drive up the final price for Whole Foods.

Competitors like Target, Costco, and Kroger have been rumoured as potential suitors, and they’d do anything to make this deal harder for Amazon, according to Barclays analyst Karen Short. But according to JPMorgan, Walmart is the only retailer with a legitimate shot of entering the fray.

Meanwhile, Morgan Stanley said in a research note that the retail drug space could experience a wave of M&A action as companies try to outflank Amazon.

“Competition across the supply chain continues to increase as Amazon inches closer to entering drug retail on the heels of the Whole Foods acquisition,” the analysts said, highlighting CVS and Express Scripts as companies with strong merger opportunities.

Dick’s, Under Armour, Foot Locker have dropped
about $US300 million in market value since Goldman Sachs predicted Amazon would start selling Nike, meanwhile.

Business Insider dug into the wreckage from the past week, looking at the three most affected industries in the US stock market. Here’s how the damage looks, with handy acronyms dreamt up by BI for each group:

Grocers, aka Woodstock (WDSTCK) -- Walmart, Dollar General, Supervalu, Target, Costco, Kroger

Business Insider / Andy Kiersz, data from Bloomberg

Grocers were most directly affected by the Whole Foods deal, and the losses are deep and widely distributed. The market cap-weighted Woodstock (WDSTCK) index have dropped 7.8% since the acquisition, including a 5.9% decline the day it was announced.

While the companies themselves have been getting shelled, traders betting against them reaped a big windfall. Short speculators made about $US500 million in the week ended June 16, according to data compiled by financial analytics firm S3 Partners.

Sporting goods, aka Duff (DUF) -- Dick's, Under Armour, Foot Locker

Business Insider / Andy Kiersz, data from Bloomberg

Sporting good retailers, specifically those selling apparel, were most directly affected by a Goldman Sachs report saying Nike may start selling products on Amazon. The market cap-weighted Duff (DUF) index has dropped 3.3% in the two days since the news. DUF pared its loss on Thursday after sinking 3.8% the day of the report. The group is still out about $US300 million in market value since the Goldman note.

It was the latest rocky patch for a sector that's come under pressure in 2017. Even before the news of Nike's possible Amazon partnership, DUF was down 28% year-to-date.

Selling directly on the site eliminates a layer between Nike and the consumer, allowing the company to better control pricing and presentation. Goldman sees it as a deal worth potentially up to $US500 million of revenue yearly -- an additional 1% of global sales for the Nike.

That's money coming out of the other retailers' pockets.

Pharmacies, aka Quack Me (CWACKME) -- CVS, Walgreens, Cardinal, AmerisourceBergen, McKesson, Express Scripts

Business Insider / Andy Kiersz, data from Bloomberg

While not as directly linked to the Amazon/Whole Foods deal as grocers, pharmacy stocks were still collateral damage. The market cap-weighted Quack Me (CWACME) index dropped 2.5% on the day of the announcement.

While the selling stemmed from anxiety over Amazon possibly entering the pharmacy business, it's not the first time those fears have mounted. A report in May that the company is seriously considering breaking into the space led to speculation about what that might look like.

However, CWACME proved more resilient than its WDSTCK and DUF peers, erasing that loss in the days following the original Whole Foods purchase.

No acronym needed -- Amazon is the kingpin in this situation

Markets Insider

The Jeff Bezos-led tech titan has surged almost 4% over the past week, adding $US18 billion of market value in the process.

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