Morning in Arizona

Morning in Arizona

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Friday, June 16, 2017

Amazon Clicks Whole Foods

Financial Review

Amazon Clicks Whole Foods


DOW + 24 = 21,384 (record)
SPX + 0.69 = 2433
NAS – 13 = 6151
RUT – 3 = 1406
10 Y un = 2.16%
OIL + .26 = 44.72
GOLD – .30 = 1254.30
BITCOIN – 2.07% = 2475.70 USD
ETHEREUM + 2.52% = 370.29

The Dow Jones Industrial Average notched its 21st record of 2017. The tech-heavy Nasdaq Composite ended lower and booked a second-straight weekly loss, extending what has proven a painful weekly stretch for tech’s high-fliers.

Amazon is buying Whole Foods for $13.7 billion, which works out to $42 per share. Yesterday, Whole Foods closed at $33.06 per share. Amazon made an unsuccessful run at Whole Foods last year. Since that attempt, Whole Foods share price dropped about 30%, or roughly the premium that Amazon is paying.

After announcing the deal, Amazon shares closed 23.54 at 987.71, gaining about $12 billion in market cap – so they almost paid for it today.

It’s not clear yet what Amazon plans to do with Whole Foods, but it has big plans for the future of grocery stores. Last December, Amazon revealed a concept for a physical store. It involves using an app as you shop.

The idea is that you open the app when you enter the store; whenever you add a product to your shopping cart, the app automatically recognizes the product, and you walk out of the store with your products, without going through a checkout line, and your Amazon account is automatically debited.

Amazon opened an Amazon Go grocery store in downtown Seattle earlier this year. Amazon has also worked on the idea of ordering your groceries online, then driving by the store and picking up your order; kind of a drive-through grocery. If Amazon can train us to pick up our grocery orders, it’s just a matter of time until they make us pick up our own deliveries.

Amazon had said it wanted to open 2,000 Amazon Fresh – branded grocery stores over the next 10 years. Don’t look for an immediate transformation at Whole Foods stores, but this clearly puts Amazon on a faster track.

The grocery market is the single largest shopping category in the US, at $600 billion in spending last year, but it’s also a tricky one because of its notoriously thin profit margins and high operating costs. Amazon might use membership fees to offset the high operating costs of grocery stores.

On the other hand, eliminating the membership requirement could help the stores reach a broader set of customers and increase sales faster. There are plenty of possibilities and as of today, it is speculation but the Whole Foods purchase changes the landscape dramatically.

Suddenly Amazon owns a nationwide network of 460 already-popular grocery stores that have already solved the tricky logistical problems involved in sourcing and storing fresh food. What Amazon brings is the world’s largest online sales portal and its mastery of the home-delivery business.

If you’re in the grocery business and your name is not Amazon or Whole Foods, today is not a good day for you. Kroger dropped 9%, Target down 8%, Costco, Sprouts, and Walmart dropped around 5% each.

If you’re a consumer, this is the next step to Amazon becoming the dominant retailer. Adding groceries means Amazon will be a one-stop destination for everything you buy. And you will visit on a more regular basis. And if you visit to buy groceries, you might just pick up a new shirt, and a flashlight, and even a book. It reinforces the behavior by which customers search for things to buy on Amazon.com, rather than on a search engine like Google.

It builds Amazon’s two-hour delivery business, which it sees as crucial to its future. It also encourages people to use the Amazon Echo smart speaker for shopping lists and purchases, which makes far more sense when you’re ordering groceries than it does when you’re trying to buy, say, a new lamp or a pair of shoes.

The Whole Foods deal is Amazon’s biggest acquisition, but certainly not the only one. In the past decade, Amazon has also purchased the web’s biggest independent online shoe store, its biggest independent online diaper store, and its biggest independent online comics store. It is already the country’s biggest online retailer of cleaning supplies and home goods.

Last year, Amazon sold six times as much online as Walmart, Target, Best Buy, Nordstrom, Home Depot, Macy’s, Kohl’s, and Costco did combined. Amazon also generated 30 percent of all U.S. retail sales growth, online or offline.

It also lends credit, publishes books, designs clothing, and manufactures hardware. And it operates Amazon Web Services, a $12-billion business that rents servers, bandwidth, and computing power to other companies. Slack, Netflix, Dropbox, Tumblr, Pinterest, and the federal government all use Amazon Web Services.

During its first 10 years in operation, Amazon rarely returned profits, and investors allowed Bezos to invest in infrastructure and market share. The result is today’s Amazon: a behemoth company that returns a meager profit, and increasingly exerts its dominance over a large part of the economy.

President Trump has ordered tighter restrictions on Americans traveling to Cuba and a clampdown on U.S. business dealings with the Cuban military. Trump signed a presidential directive rolling back parts of Obama’s historic opening to the Communist-ruled country after a 2014 diplomatic breakthrough between the two former Cold War foes.

But Trump left in place many of Obama’s changes, including the reopened U.S. embassy in Havana. Trump’s revised approach calls for stricter enforcement of a longtime ban on Americans going to Cuba as tourists, and seeks to prevent U.S. dollars from being used to fund what the Trump administration sees as a repressive military-dominated government.

U.S. homebuilding fell for a third straight month in May to the lowest in eight months as construction activity declined broadly.  Housing starts fell 5.5% to an annual rate of 1.09 million in May.

And the University of Michigan consumer-sentiment index fell to 94.5 in early June reading, the weakest since November. The modest 2.6 percentage point decline in sentiment masked a much larger decline since June 8 when Comey testified to the Senate Intelligence Committee.

Prior to the testimony, the sentiment index had averaged 97.7, but since June 8 the index registered at 86.7, a decline of 11 points. The decline was observed across all political parties, but Republicans had the bigger loss of confidence.

Aside from the weekly jobless claims, most of the economic data released this week—inflation, retail, housing—was below expectations.

We’ve told you about the problems at Wells Fargo, how they opened more than 2 million bogus accounts, how they changed mortgage terms without customer approval, how they retaliated against whistleblowers.

Now, it seems it is contagious. A CenturyLink employee claims she was fired for blowing the whistle on the telecommunications company’s high-pressure sales culture that left customers paying millions of dollars for accounts they didn’t request, according to a lawsuit filed this week in Arizona state superior court.

The complaint alleges CenturyLink “allowed persons who had a personal incentive to add services or lines to customer accounts to falsely indicate on the CenturyLink system the approval by a customer of new lines or services.” This would sometimes result in charges that hadn’t been authorized by customers, possibly millions of dollars in unauthorized fees.

CenturyLink is amid a $34 billion merger with Level 3 Communications. CenturyLink shares lost 7% today. T-Mobile was the subject of a critical report in December from a labor group called Change to Win Retail Initiatives that said the carrier put its sales staff under pressure to meet difficult sales goals. The pressure caused T-Mobile employees to force some customers to enroll in services they didn’t necessarily want or authorize.

Seriously, this might be a contagion. Maybe we should call it Wells Fargo-itis.

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