The market is sending a clear signal that now it’s now good for the grocery business. The Amazon-Whole Foods deal is expected to hurt many grocery store chains in the United States. Costco Wholesale Corporation (NASDAQ:COST), which operates membership-only warehouses in the United States, Canada, United Kingdom, Mexico, Japan, Australia and Spain, saw a significant drop in its share price following the announcement of the Amazon-Whole Foods deal. Since the deal was announced on June 16, Costco’s stock has tumbled 12.73%, the worst six-day percentage performance since the stock tumbled 13.4% during the six-day stretch ending Nov. 19, 2008, according to a report from MarketWatch.
Amazon.com, Inc. (NASDAQ:AMZN) struck a deal to acquire Whole Foods for around $13.7 billion. The transaction is expected to be completed by the end of this year.
Following the deal announcement, Stifel Nicolaus analyst Mark Astrachan, cut his price target on Costco stock to $173 from $191 but he kept his buy recommendation on the membership-based warehouse retailer.
Astrachan, who hosted a recent meeting with Costco Wholesale Corporation (NASDAQ:COST) executives, told MarketWatch that the warehouse retailer’s executives were “surprised at both the deal and the negative share-price reaction” as they thought other grocery store chains would be more exposed than Costco to competition stemming from the Amazon-Whole Foods deal.
In note to investors obtained by MarketWatch, Astrachan wrote:
“From a stock standpoint, while Amazon/Whole Foods will not impact near-term results, it is likely to impact industry trends longer-term, which uncertainty regarding strategic plans for the combined entity and the response from legacy participants, limiting multiple expansion, and share price upside, from current levels.”
According to industry experts, the merger will allow Amazon to use the 460-store Whole Foods chain to penetrate deeply into the grocery market. The e-commerce giant could make it easier for customers to quickly pick orders at Whole Foods stores. About 90% of Amazon Prime members live within 10 miles of a Whole Foods store.
“This deal is going to upend the entire grocery store industry,” Phil Lempert, a food marketing expert based in Los Angeles, was quoted as saying by The Des Moines Register. “The big opportunity will be for Amazon to put lockers at Whole Foods where (customers) can pick up all the other stuff they order from Amazon.”
Meanwhile, shares of Costco Wholesale Corporation (NASDAQ:COST) closed down 1.66% on Friday. The stock is down nearly 2% so far this year. During the last 12 months, the membership-based warehouse retailer’s share price has gained just over 1%.
