This article was originally published on D CEO Real Estate
Amazon has been on an amazing run. The company’s growth has been unlike anything we have ever seen in retail.
However, it has only been in the last few years that Amazon has turned a profit—and that profit is very small as a percentage of sales. Currently, their price-earnings ratio is 242.9, which is about 10 times that of Apple or Google. Wall Street loves Amazon and believes that it will continue to capture market share and eventually start making better margins.
As we have all read, Amazon recently acquired Whole Foods Market for $13.7 billion. Whole Foods, as opposed to Amazon, is a high margin business, particularly for the grocery business. It has stood out in the grocery industry, which is known for its high volumes and thin margins.
Now things are changing. On the day of closing of the acquisition, Amazon announced it was slashing prices at Whole Foods by as much as 35 percent on some items and as much as 16 percent overall. Amazon is also centralizing more of Whole Foods’ purchasing, which had been intentionally decentralized to allow for more local goods to be sold inside stores. While it may sacrifice quality, it may allow Whole Foods to get costs down, which could let it lower prices even more. This has all Whole Foods’ competitors scrambling, as prices are already down more than 4 percent over the last 12 months. Its new pricing is putting even more pressure on all the grocery competitors.
Can Whole Foods gain market share and begin to raise prices? Now that it is owned by Amazon, does it need to raise prices or can it operate at little or no margin? How can other grocers, whether public or privately-owned, compete with Whole Foods when Wall Street has not required Amazon to make much if any profit, at least for now?
All of this is in play while we wait to see what Whole Foods will mean to Amazon in terms of grocery delivery and other so-called last mile logistics, as well as how the competition between Amazon and Walmart will continue to unfold.
Stay tuned—it is sure to be an action-packed ride!
John Zikos is a principal and managing director at Venture Commercial Real Estate.