Watch out Walgreens Boots Alliance (NSADAQ:WBA), Amazon.com Inc (NASDAQ:AMZN) is coming after you. That at least is one of the conclusions drawn by a Wall Street heavyweight, which Monday gave its assessment of the Amazon’s US$13.7bn swoop for Whole Foods Markets (NASDAQ:WFM). Not only is Whole Foods the online retailer the biggest transaction to date, it provides a massive statement of intent.
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Amazon is prepared to go offline to buy a slice of US$780bn grocery market.
Wall Street bank
Morgan Stanley in a note reckons this could be a prelude to a move into healthcare - another huge chunk of the sector worth almost US$500bn annually. For sure, it will be difficult and expensive to gain a toe-hold in healthcare; but Whole Foods may solve a problem in that regard. “[Previously] we wrote about how the lack of a brick and mortar presence is likely to hold back Amazon’s ability to penetrate the $465bn pharma market,” Morgan Stanley said. “Amazon’s acquisition of Whole Foods solves that issue. “Many regulatory and logistics questions remain, but at a high level this is a material step forward in Amazon’s potential ambitions to build a pharmacy business.” Assessing the wider implications of the deal, the investment banks said the takeover will be immediately earnings enhancing - to the tune of around US$700mln. Having an offline as well as online presence removes a “pain point” for consumers, while enhancing the opportunity for Amazon Prime with the potential to develop a service that delivers groceries within one to two hours of order.
Target in the crosshairs
Whole Foods might also provide more shelf space of Amazon product, Morgan Stanley said. It rates the stock ‘overweight’ with a US$975 a share valuation. It believes Whole Foods mainline rival Target Corp (NYSE:TGT) could be the biggest casualty of the Amazon swoop into groceries. “We think an Amazon/Whole Foods combination is a significantly damaging competitive blow to Target given the high store/customer overlap. “Whatever competitive pressures were out there before today are now accentuated with this move.”