Amazon.com's (NASDAQ: AMZN) $13.7 billion acquisition of Whole Foods Market shook up the retail sector, stunning investors and sending supermarket stocks plunging. Indeed, it was a surprising move and indicated a new direction for Amazon, but the worst lesson investors seemed to take from the deal is that it immediately conveyed value on all other brick-and-mortar retailers as if they could be the next targets of Amazon.
Former Sears Holdings (NASDAQ: SHLD) board member Bruce Berkowitz argued that the deal made Sears more valuable, telling Bloomberg, "It says to me that there is a need for physical space in retailing."
Others have suggested over the years that Amazon acquire Sears. The agreement Kohl's (NYSE: KSS) made late last year to set up Amazon shops selling gadgets like Echos and Kindles and to accept Amazon returns in some stores also sparked rumors that Amazon would eventually acquire Kohl's.
Then last week, tech analyst Gene Munster threw more fuel on the buyout fire, predicting that Amazon would acquire Target (NYSE: TGT) this year. He argued that Target is the ideal offline partner for Amazon for two reasons: shared demographic and manageable but comprehensive store count."
However, the enthusiasm from Munster and other for another Amazon retail buyout is foolish. Here's why.
Image source: Whole Foods.
The Whole Foods deal was unique
The Amazon-Whole Foods tie-up made sense in a number of ways that no other acquisition would for Amazon. First, the two companies have similar customer bases, both targeting higher-end customers in cities and their customer bases have a significant overlap. Also key in the deal, Amazon had been angling for a position in the $800 billion grocery market for a decade, since it launched Amazon Fresh in Seattle in 2007. However, it had had little success, prompting the bid for a brick-and-mortar partner.
The timing was also excellent, with Whole Foods' shares having fallen because of a string of comparable sales declines and because activist investor Jana Partners had taken a stake in the company, agitating for a sale. As a result, Amazon got a good price for a great brand in a category it desperately wants to grow in.
No other retailer presents that kind of opportunity. Shoppers flock to Target and Kohl's to buy things like apparel, home goods, and electronics, categories Amazon already competes well in online. Amazon is already on its way to becoming the country's biggest apparel seller. Its success in electronics has put chains such as Circuit City and hhgregg out of business, and it's building out its own furniture and home-goods business. Adding Target's nearly 2,000 stores for a price of more than $40 billion to gain an offline presence in those categories just doesn't make any sense.