Amazon buying Whole Foods – Notebook

I was on vacation last week, so this notebook is a little stale. Perishable news. (JOKES!)

The basics

  • The deal size is $13.7bn, a 30% premium; expected to close in the second half of this year (Todd Bishop)
  • Highly likely to remain independent: “Reading between the lines of Bezos’ statement, Amazon is signaling that it doesn’t plan to disrupt what Whole Foods is doing with a major shakeup of the retailer’s infrastructure or strategy in the near term. Amazon has a history of allowing acquired companies — from Audible to Twitch to Zappos — to continue operating with relative independence, with some product and feature integrations.” (Ibid.)

Not good for competition

  • Investors really believe in that AMZN magic: “In total, those five grocery chains [Target, CostCo, Kroger, Walmart, SuperValu] shed about $26.7 billion in market capitalization between the market’s close Thursday and Friday morning, as investors worried that Amazon deeper push into the industry could be a death knell for some.”
  • EU too: “The worries weren’t just contained to U.S. markets. Some investors in the U.K. and Europe also saw the purchase as a sign that Amazon could take its grocery ambitions global. Shares of French retailer Carrefour fell sharply on the news, about 4%, while in London, Tesco shed 6% and Sainsbury dropped 5%.”
  • See chart too.

Synergies, strategies

  • More brick-and-mortar, foot-traffic, and distribution centers for Amazon: “the acquisition provides the AmazonFresh program, currently only in 15 markets, with 465 new locations [the Whole Foods stores] that generate eight million customer visits per week as well as 11 warehouses.”
  • Amazon now has a big foot-print across the US, at least in affluent neighborhoods.
  • Like Amazon, Whole Foods is big into private label: “Whole Foods generates $2.3 billion worth of private label and exclusive brand sales per year; its private label products account for 32% of items in Instacart’s food category, taking up far more of the shelf than Walmart Grocery (16%) and Peapod (6%).”
  • (Further) driving down supplier costs: “It’s also possible that Amazon will use Whole Food’s partnerships with suppliers to get more of them on the Amazon platform. Amazon and Whole Foods will be tough negotiators, but the lure of the 300 million customer accounts on Amazon.com, in addition to all of its other CPG-related programs, will be tough to turn down.”
  • More: “he scale at which Amazon is making use of this strategy should force CPG brands and Big Box retailers to make some major changes to their distribution strategies.”
  • Ben Thompson, with some multi-sided platform theory sprinkled in:
  • “The truth, though, is that Amazon is buying a customer — the first-and-best customer that will instantly bring its grocery efforts to scale.”
  • “What I expect Amazon to do over the next few years is transform the Whole Foods supply chain into a service architecture based on primitives: meat, fruit, vegetables, baked goods, non-perishables”c
  • “At its core Amazon is a services provider enabled — and protected — by scale.”
  • This should remind you of the “middle-man”/unpaid for buy in my warehouse/drop-ship type of advanced retail play that the likes of Dell made famous.
  • I want pizza and baby-wipes, not software – this kind of argument (though, not really “invalid”) makes me bristle. It’s like a pizza company saying they’re a technology company. As long as the pizza comes in the box and the paper-towels come in the mail, they can call themselves whatever they want…but the pizza shop and Amazon are, to me, a pizza and retail company. How they get the pizza into my mouth is not my problem. Since I’m a paying customer in these instances, it’s not like the “you are the product” epiphany of .com, eye-ball companies.

Instacart?

  • Whole Foods had invested in Instacart in May 2016. What up with that, now?
  • Laura Entis: “Just last year, Instacart and Whole Foods signed a five-year delivery partnership, which gave Instacart exclusive rights to deliver Whole Foods’ perishable items.”
  • I guess it’d make sense for someone like Walmart to acquire them. Can Instacart be stand-alone now?

Getting that cash

  • For TAM:
  • FMI put estimate the US TAM at $668.680bn in 2016.
  • Statista, on the US market: $606.26 in 2015.
  • Very old, but the USDA in 2011 said, “The [US’s] 212,000 traditional foodstores sold $571 billion of retail food and nonfood products in 2011.”
  • Online grocery TAM: “Last year, online grocery sales were about $20.5 billion.” The growth rates, of course, are huge compared to in-store.
  • More market slicing numbers.
  • Room to grow, future cash to grab:
  • “Grocery remains the most under-penetrated e-commerce category, with less than 5% of sales happening online. However, with 20% of grocery sales estimated to begin online by 2025, brands investing in digital will reap the rewards.” (Elisabeth Rosen)
  • Online groceries penetration: “The online grocery business is still in its infancy. Last month, for example, 7% of U.S. consumers ordered groceries online, according to Portalatin. Of this group, 52% already has an Amazon Prime account. Groceries represent “the final frontier for Amazon — they haven’t quite cracked the code on that, but they already have a relationship with consumers.”
  • Some interesting grocery spending trends, by demographic, from Nielsen in 2015, via Cooper Smith:

grocery-spending.png

  • Mint says that last year, my family of two adults and two kids spent ~$15,000 at the grocery store. So that’s around what you’re upper-middle-class people (or whatever I am somewhere in the 90th percentile) spend, I guess.

For us consumers…

  • Many predict either free or highly discounted delivery fees for Amazon Prime members. That certainly makes sense as Amazon Video and Music, and Prime Now, shows.

More

DevOps at Disney, management lessons learned – Notebook

New types of software and delivery mechanisms (SaaS, mobile) mean new problems and scale:

“We were so used to dealing with tens of servers and suddenly it was hundreds and thousands of servers,” which in turn created more work for the development teams.

More:

“The digital expansion of business equals more work and firefighting,” Cox said.

Less time spent doing dumb-shit:

employees used to spend the eight hours of the park closed every night, manually updating each server. Now only one person can update the whole fleet in 30 minutes.

Some guiding principals and management challenges:

Cox said that leading a change of this order of magnitude involved three crucial ingredients:
1. Collaboration: break down silos, mutual objectives.
2. Curiosity: keep experimenting.
3. Courage: candor, challenge, no blaming or witch-hunting.
But  these can come with its own leadership challenges, including:
• The politics of command and control.
• How new leadership can take a company in a new direction.
• The blame bias of who versus what.

And, some good motivation:

We keep moving forward, opening up new doors, doing more things because we’re curious.

All from Jennifer Riggins’s write-up at TheNewStack

Karl Lagerfeld’s daily routine, circa 2012

Who doesn’t like a good what’s in bag/what I do each day post?

I used to fax a lot, but people don’t have faxes anymore.

In this routine, what’s remarkable is how much he avoids people, e.g.:

I don’t go out that much because I’m always late, and I’m so busy and so pleased with what I’m doing that I’m not really ready for a social evening. That’s over—the people I was going out with are dead or don’t exist anymore.

Link

Good intentions & indolent portfolio management lead to legacy quicksand

The downward spiral (driven by budgeting, risk-aversion, and ROI-think) that make legacy IT bloom like algae in a stagnant creek, from Chris Tofts:

With a limited budget for maintenance or improvement, how will it be allocated to the various systems managed by IT? Remember that in having to justify the spend at all, the primary need is to demonstrate business impact and – equally – guarantee that there is no risk to continued operations.

Inevitably, depending on organisational perspective, there are essentially three underlying approaches. First, maximise the number of systems that have been updated: demonstrate lots of work has taken place. Next, minimise the risk that any update will fail: have no impact on the ongoing organisation. Finally, maximise the apparent impact on the direct customers for IT systems – improve the immediate return to the business.

If the organisation maximises the number of systems updated then the clear imperative is to choose systems that are easy (cheap) to update. The systems that are cheap to update are invariably the ones with the least difference between in-use and current. In other words, the systems that were updated during the last round of updates. So the organisation will choose to improve those systems just beyond some minimum obsolescence criteria and until all of the budget is spent.

And then, you get bi-modal infrastructure:

It’s hard to say what the fix is beyond “don’t do that.” Perhaps a good rule of thumb is to attack the hard, risky stuff first.

Getting The Business to pay attention to legacy like they do cash-losses is also an interesting gambit:

As boring as it sounds, if organisations had to carry technical debt on their books – just like they carry the value of their brand on their assets – then, finally, they might understand both their exposure and necessary spend on their critical IT assets.

Link

The Internet is still the wild-west

Good pointing out of needing some law and ethics to catch up to the Internet:

The Internet brought us hyperconnectedness, but we’re really not ready to cope. We don’t have institutions and firewalls in place to prevent abuse of the system. The law can’t keep up, and doesn’t have the teeth in place anyway.

Link

Apple makes major podcast updates, tracking how much user’s actually listen

Apple said today that it will be using (anonymized) data from the app to show podcasters how many people are listening and where in the app people are stopping or skipping. This has the potential to dramatically change our perception of how many people really listen to a show, and how many people skip ads, as well as how long a podcast can run before people just give up.

Link

Podcast market estimated at over $220m

As covered by Axios, in a report from IAM/PwC. As noted in the notes below the chart, these figures are based on a sub-set of the market, 20 advertising outfits. No doubt, they represent a huge part of revenue however. It’s hard to imagine that there’s many more millions in podcast advertising.

Also as highlighted by Sara Fischer:

Edison Research and Triton Digital estimates 98 million U.S. adults listen to podcasts.

Link

In finance, large banks seem to be fast followers, not disruption victims

Eventually every advisor will be a robo-advisor, which means there will be convergence.

Without some marketshare numbers, it’s tough to tell if the banking startups are making a dent against incumbent banks. Josh Brown suggests that banks are quick to catch-up and have nullified any lead that companies like Weathfront could have made:

It wasn’t long before the weaker B2C robo-advisors folded, the middling players were acquired and the incumbents launched their own competing platforms. The miscalculation on the part of the disruptors may have been the idea that they had years of lead time to scale up their assets before the lumbering giants of the industry would be able to fight back. Turns out they only had months, not years. Charles Schwab and Vanguard launched their own versions of the service and the mindshare / market share battle was joined.

Checks out

From what I see out there, banks are quick to adapt and adopt new ideas into their businesses. While they’re beset with endless legacy IT and technical debt, they churn ahead nonetheless, e.g.:

While past performance is no guarantee of future results, and even though all the company’s results cannot be entirely attributed to BBVA’s digital transformation plan, so far many signs are encouraging. The number of BBVA’s digital customers increased by 68% from 2011 to 2014, reaching 8.4 million in mid-2014, of which 3.6 million were active mobile users.

Acquisition isn’t always failure, or victory

On the narrative framing side, it’s easy to frame a startup being acquired as “failure” and success for incumbents. That’s not always the case, and suggests a zero-sum view of innovation in industries. Acquisitions can have winners and losers – as with valuing anything, like real estate, the valuation could be wrong and in favor of the buyer or seller.

However, in the ideal case of an acquisition, it makes strategic sense for the buyer to spend their time and money that way instead of trying to innovate on it’s own. For the startup being acquired, they’re usually near the end of their gamble of sacrificing profit in favor of innovation and growth and need someone to bring them to the black.

Link