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Finanzas: The Genius Of Amazon’s Whole Foods Acquisition

Finanzas: The Genius Of Amazon’s Whole Foods Acquisition
Julio 10, 2017

Autor/Fuente: Seeking Alpha 👤Periodista: María Luisa Ayala 🕔10.Jul 2017

 

Summary

  • Amazon’s supply chain expertise will disrupt the entire grocery industry in a way not seen since bar codes and scanners were introduced 30 years ago.
  • Refreshing inventories several times per day will reduce grocery store footprints and reduce more expensive retail rents.
  • More rapid inventory turnover will increase the ROIC and accelerate profits.
  • Over the next 4 to 7 years, Amazon/Whole Foods will create huge disruptions in the grocery industry. Patient investors will be rewarded. Others in the sector who stand pat are likely to be pummeled.
  • “Just-in-time” inventory and other measures will push suppliers to much tighter efficiencies and much lower production.

Amazon’s Masterstroke

Amazon’s (AMZN) purchase of Whole Foods (NASDAQ:WFM), announced June 16th, will create a variety of efficiencies and opportunities for the “retail” giant. For others in the grocery and food space, it may be one of the most significant economic disruptors of this generation, if not this half of the century.

Amazon is viewed as a retailer, but is actually a logistics and supply chain company. It will bring that expertise to Whole Foods to significantly reduce its brick-and-mortar footprint and increase its margins by radically altering the retail food supply chain.

At the Store Level

First, Amazon will be able to reduce in-store inventories and the footprint of most urban and suburban grocery stores using its existing supply chain expertise.

Think about it: when you go to your regular grocery store, do you really need 50 cans of Campbell’s Cream of Broccoli soup, 50 cans of Mushroom Barley soup, 50 Cans of Chicken Noodle Soup, etc.? Really, do you need that kind of inventory sitting around for any particular foodstuff?

The logistics of the grocery business haven’t really changed much since “supermarkets”, the term of art when they were introduced in 1930, first came about. The only significant change in how supermarkets have done business in the last 50 years is barcodes and check-out scanners. Take those away and the average grocery shopping experience is pretty much identical to what you would have experienced in 1955.

But although scanners improved inventory control and “upstream” supply chain efficiencies of suppliers and manufacturers, those efficiencies are taken for granted today. Most groceries are still storing the aforementioned 50 cans of every possible variety of Campbell’s soup, replaced under 1980’s era Economic Order Quantity (EOQ) inventory standards.

A disruptive, radical change – one that asked “Why are we doing it this way?” – was long overdue in the grocery business. Amazon is well positioned to do that; to create the kind of just-in-time, razor-thin, tight-as-a-drum inventory controls and supply chain management that will create enormous efficiencies in the grocery sector.

It will also create enormous disruptions.

Today, Amazon makes thousands of deliveries of groceries and retail items to residences in urban centers, often on the same day the goods are ordered. Imagine then, that instead of delivering groceries to thousands of individual homes and apartments thousands of times a day over vast areas in an urban center, Amazon concentrated on delivering small quantities of replacement inventory 6 or 8 or 10 or 12 times a day to maybe 30 or 40 small footprint neighborhood grocery stores using instantaneous inventory ordering.

Instead of Amazon/Whole Foods ordering and keeping 50 cans of every flavor of Campbell’s Soup stored on a grocery shelf for weeks and months at a time, imagine maybe 10 cans of each variety, with inventory replenished as many as 12 times a day by deliveries from tractor trailers, panel trucks, minivans or even hand trucks. That’s the model I suspect that Amazon will pursue in the new, smaller footprint Whole Foods “grocery stores” (not “supermarkets”) with an elegant, swiss-watch like supply chain.

At the Amazon/Whole Foods grocery store level, the new model will mean smaller leased space, and thus a much smaller monthly rent, less money tied up in inventory, and much more accelerated inventory turnover.

If one contemplates the grocery business in the context of Lean Six Sigma (Lean 6σ) and particularly Little’s Law, inventory sitting on shelves can be considered work in process, or WIP (i.e., because holding inventory is not a value-added activity; it is “waste”, in the language of Lean 6σ analysis, that provides no value added to consumers. After all, grocery customers pay you for the soup, not for letting it sit on your shelf). From there, anyone familiar with Lean 6σ can easily see that the drastic reduction in inventory – WIP, in Lean 6σ parlance – will reduce total lead time, thereby increasing process cycle efficiency.

That boost to process cycle efficiency will, in turn, boost the return on invested capital and accelerate profits, which are the ultimate objective of Lean 6σ. (You don’t need Lean 6σ to figure out the intuitive sense that keeping inventory for less time and selling it much quicker will accelerate revenue realization, but it certainly helps.)

Two other things are also likely to happen:

  • First, Amazon/Whole Foods stores will source their local market residential deliveries from the small grocery stores, not from Amazon’s regional distribution centers. It will be the same local residential delivery pattern that supermarkets use to deliver locally today. That method – simpler, more direct, and with more direct ties to customers who would be just blocks or a couple of miles away — will soon overwhelm home grocery delivery companies like Wal-Mart (WMT) and Fresh Direct who will, presumably, continue to deliver from their warehouses.
  • Second, because of the growing evidence of food safety issues that arise when home grocery deliveries are not promptly refrigerated, it’s reasonable to think that the government might place higher regulatory burdens on the Wal-Mart and Fresh Direct home delivery model, like requiring an adult to be home at the time of delivery (not something easy to time or arrange when making multiple home deliveries from several miles away. Imagine being tethered to your home waiting for your groceries in a “two-hour window” as if waiting for “the cable guy”, but doing it every week.) As often happens, government regulators could severely burden the Wal-Mart and Fresh Direct residential delivery model from a central warehouse miles away while a local Amazon/Whole Foods grocery delivery from a few blocks or miles away would be much easier.

At the Supplier Level

Amazon’s stringent supply chain standards will also stretch back to producersand distributors. That’s a reason why a lot of the big food producers sunk on the Amazon acquisition announcement.

Much smaller retail inventories will mean a greatly decelerated cash flow into the wholesalers’, suppliers’ and producers’ coffers. That will mean price competition for a much smaller market share of the new paradigm of reduced inventories, and far more stringent supply chain and inventory best practices as state-of-the-art logistics come to be the standard in the industry.

Inevitably, there will be bankruptcies and takeovers of companies in the food stuffs supply chain who cannot keep up with the new, smaller, more accelerated scale of production and delivery schedules demanded by the new supply chain best practices. This could allow Amazon to vertically integrate its supply chain by takeovers of distressed well-known consumer brands, or it could simply mean a food conglomerate with the requisite supply chain expertise could rise to dominate the food supply industry. (The latter would be better for Amazon, given federal antitrust laws that might challenge “The Everything Store”.)

What is certain, though, is that the notion of your friendly neighborhood supermarket will be gone within a generation (and likely far less), obsoleted by efficiencies and technology. Those who are on the right side of the trade stand to profit.

In view of this, we suggest these for long-term, patient investors:

Long: Amazon, United Parcel Service (UPS) and other highly efficient supply chain service companies; paper box carton companies like Rock-Tenn (RKT), Sonoco Products (NYSE:SON), Packaging Corp. (NYSE:PKG), or Temple-Inland (TIN), which will likely be called upon to produce boxes customized to smaller deliveries of foodstuffs instead of traditional cases.

Short: REITs with a significant portion of their portfolios in grocery stores, like Regency Centers Corp. (REG); consumer packaged goods and food producing companies and brands, like Campbell’s Soup (CPB), Coca-Cola (KO), Kraft/Heinz (HNC), Mondelez International (MDLZ) (owners of Nabisco), and other similar companies whose bottom lines will be reduced by tighter inventory controls and much slower revenue realization.

Speculative: Grocery chains such as Publix (OTC:PUSH), Kroger (KR), Safeway (SWY) and Winn-Dixie (NASDAQ:WINN) if one speculates that Wal-Mart will try to replicate Amazon’s strategy and takeover other groceries. But if these companies are not takeover targets, they will suffer under the new business model.

Author’s note:Our commentaries most often tend to be event-driven. They are mostly written from a public policy, economic, or political/geopolitical perspective. Some are written from a management consulting perspective for companies that we believe to be underperforming and include strategies that we would recommend were the companies our clients. This approach lends special value to contrarian investors to uncover potential opportunities in companies that are otherwise in downturn. (Opinions with respect to such companies here, however, assume the company willnotchange.)

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Disclaimer: The views expressed, including the outcome of future events, are the opinions of the firm and its management and do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers.

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.

Additional disclosure: Disclaimer: The views expressed, including the outcome of future events, are the opinions of the firm and its management and do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers.

Fuente: Seeking Alpha

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