Food for thought… Amazon and Whole Foods an investment lesson
July 6, 2017
On June 16, Amazon.com Inc. announced its intended purchase of Whole Foods Market Inc. for $13.7 billion (US), and the reaction was swift.
Many in the grocery channel predicted doom and gloom and a total disruption within the North American retail food market. I see an investment lesson. One that could be helpful in managing your investment portfolio.
Food distribution is a mature business. Competition is fierce and margins are low. It’s really hard to make a good profit selling food.
Currently, the majority of grocery sales occur in bricks-and-mortar retail outlets. E-commerce accounts for just 5 per cent of North American sales in the grocery market.
Interestingly, Canadians aren’t adopting e-commerce as quickly as Americans.
According to the Retail Council of Canada, our online shopping represents only 1.99 per cent of fast-moving consumer goods sales.
The majority of the 460 Whole Foods Market stores are in North America, including 13 in Canada.
Its upscale brand considers ‘quality the highest form of value’ for its customers.
The magic of this takeover will be the ability of Amazon to capitalize on the high-quality brand image of Whole Foods while using its expertise in cost-cutting and efficient distribution.
Opening up low-cost distribution centres will give Amazon a competitive advantage over the expensive real estate of most food retail outlets.
Delivery is what they do best, and in some markets, delivery can be done within one hour of the order being placed.
That is a game changer, which leads us to the investment lesson.
Never feel confident that any single investment you own is safe. By single investment I mean owning a specific stock.
The world is spinning quickly these days and the laws of business competition can be as tenacious and unpredictable as the laws of nature.
Strong winds are blowing in all aspects of commerce and owning specific individual stocks can be unpredictable and risky.
The lesson is to understand and respect the beauty of diversification. Spread your money around to many different companies, in many different industries, in many different countries.
Own the market, versus just a few of your favourite stock picks.
You don’t know the future therefore you are encouraged to diversify to protect yourself from investments that suddenly fall out of favour.
The day the Whole Foods takeover was announced, many large and respected food distribution companies, from Loblaw’s and Sobey’s to Costco, had their stocks react negatively with a sudden decline in value.
In this column, I have often referred to the tragic fall from grace of Nortel and how investors with concentrated positions in that stock lost significantly. The historic landscape is full of these examples.
A friend recently reminded me that Blockbuster was once an empire that dotted the North America landscape. We would happily hop in our cars and drive to a retail location to choose a movie to watch at home.
Blockbuster was a revolution against watching conventional TV. Then a little upstart called Netflix came along and at the push of a button we had more movie selections than we could seemingly watch in a lifetime.
Blockbuster had an opportunity to buy Netflix, but decided to compete with them instead. Blockbuster went bankrupt.
There will be other Nortels and Blockbusters. Protect yourself against the cruel and harsh reality of business and accept that excellent companies can suddenly disappear.
Diversify your portfolio.
Peter Watson is an agent of, and securities products provided by, Aligned Capital Partners Inc. (ACPI). ACPI is a member of the Investment Regulatory Organization of Canada and the Canadian Investor Protection Fund. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments.