Amazon has thrown down its latest gauntlet. It’s offering Whole Foods shoppers who use an Amazon Prime Rewards Visa card 5% cash back on purchases. Cardholders who aren’t Prime members can still get 3% back by using the Amazon Rewards Visa Card, CNN reported on 2/20. That follows news that Whole Foods is charging brands more money for prime shelf space at the grocery store and additional fees.
The ripple effects from Amazon’s foray into the grocery business seem to be growing wider by the day.
Let’s take a look at some of the recent news that’s related, directly or indirectly, to the Seattle retailer’s charge into the food business:
(1) Walmart staggers. Walmart’s efforts to compete with Amazon have been costly. A 2/20 Bloomberg article calculated that Walmart’s spending on online expansion and cutting prices have reduced its operating margin to 3.3%, the lowest in the retailer’s history. Combine that with the company’s slowing ecommerce sales—23% y/y in Q4 versus north of 50% in the prior three quarters—and it’s no surprise that Walmart shares fell more than 10% Tuesday.
(2) Defensive buying. Albertsons plans to buy the 4,300 Rite Aid stores that aren’t being bought by Walgreens Boots Alliance. The deal will result in $375 million of expected annual costs savings, increase scale for both players, and expand Rite Aid’s e-commerce offerings by tapping into Alpertson’s expertise. The deal will give Albertsons, which is currently privately held, a way for its shares to trade publicly. The combined company will have about 4,900 grocery stores and 4,300 pharmacies across 38 states.
After the latest news, the three largest pharmacy chains in the US are now in the midst of deals, as CVS has agreed to buy Aetna, and Walgreens is in discussions to buy AmerisourceBergen.
(3) Grocery wars. As Amazon and grocery store retailers duke it out, both are squeezing the profits of their suppliers, the food companies. Q4 results indicate that the pressures have only intensified of late as consumers look for healthier meals and snacks.
Kraft Heinz said its Q4 comparable sales fell 0.6% globally, including a 1.1% drop in the US, a 2/16 WSJ article reported. At Campbell’s, comparable sales fell 2% in Q4 as US soup sales dropped 7%, hurt by the end of a promotional deal with Walmart, the Journal reported. Smucker’s overall sales rose 1% in Q4, but sales in its US consumer foods segment declined.
(4) Diverging results. Amazon is a member of the S&P 500 Internet & Direct Marketing Retail stock price index, which is up 63.7% y/y through Tuesday’s close. The industry is expected to have earnings growth of 40.9% over the next 12 months, and it has a forward P/E of 80.4, which is a 13-year high (Fig. 1).
The S&P 500 Food Retail stock price index, which has Kroger as its only constituent, is up 2.5% y/y, and earnings are expected to grow only 3.7% over the next 12 months (Fig. 2). The industry’s forward P/E has fallen from north of 20 in early 2015 to a recent 13.4 (Fig. 3).
The S&P 500 Packaged Foods stock price index is down 7.4% y/y, even though analysts expect the industry to grow earnings by 10.1% over the next 12 months. The industry’s forward P/E has fallen from north of 20 as recently as June 2017 to a four-year low of 16.4 (Fig. 4 and Fig. 5).
Walmart and Costco make up the S&P 500 Hypermarkets & Super Centers stock price index, which is up 25.4% y/y (Fig. 6). That move is thanks primarily to Walmart shares, which are up 35.7% y/y even after Tuesday’s drop. Costco shares, on the other hand, are up only 7.0% over the past year. The industry is expected to post 12.3% earnings growth over the next 12 months, the highest in 12 years, and its forward P/E, at 22.0, is near peak levels of the past 14 years (Fig. 7).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
© 2022 Newsmax Finance. All rights reserved.