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She's a Killer Queen
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Killer Queen - Queen
"Your margin is my opportunity."
So, today's big market news was Amazon making an offer to buy to buy Whole Foods Market for $13 billion according to The New York Times. It looks like Amazon now wants to sell you a Prime Membership with some prime rib! I wonder whether that means cashiers at Whole Foods Market will become Amazon Affiliates and get referral income for selling wholesome items like kale or grass fed ground beef?
Seriously, though, the question is why an online retailer like Amazon would want to buy an upscale grocer like Whole Foods?
The answer lies in the quote above from Jeff Bezos.
You see, the profit margins in the grocery store industry are historically low. Whole Foods, however, has a higher operating profit margin than a majority of other grocers in the space due to the types of upscale foods they carry and sell.
Amazon wants a piece of that margin to add to its already growing bottom line from online retail. I believe Amazon is pursuing a two-prong strategy with this deal.
First, they hope to use the stores as mini-distribution centers to experiment with same-day delivery of high-quality groceries to your front door. The move is a shot across the bow at Wal-Mart which already offers similar services across the U.S.
Second, the move could be a greater strategy to disrupt the grocery industry as a whole. If Amazon finds a way to make the sector's already small profit margins even lower, that could put some grocers out of business, especially those with high levels of long-term debt.
So, what does this mean for you as an investor?
If you haven't noticed by now, Amazon is a retail disruptor. The company is ruthless in pursuit of driving margins lower to weed out inefficient players in the markets they operate to gain market share.
What industry could they disrupt next?
How about pharmacy benefit managers? The group has historically low margins just like the grocery industry. Amazon could just as easily set up a PBM and put together relationships with insurers to drive down the cost of brand name and generic drugs to consumers.
The key to something like this happening is if regulators allow a company like Amazon to establish itself as a new player in the industry. Amazon would need to put together a key group of executives to oversee the operation, which Amazon has a knack for.
Should Amazon proceed with setting up a PBM to compete with the majors like CVS Caremark, Medco, and Express Scripts, look for a significant smack down in those stocks' prices across the board over the short and long term.
Amazon could become the next half-a-trillion dollar market-cap stock with more deals like this one. If I were operating in a low margin industry right now, I'd be looking over my shoulder for the shadows of Amazon.
It looks like Amazon shareholders have a lot to look forward to over the next year or two.
Thanks for reading @ellofinance today. Have a great weekend, and save a scoop of ice cream for me, won't you? I love Neopolitan!