I was a big proponent of WFM in its early days but haven’t owned it for a long time.
My quick look at the company’s financials this morning tells me it’s an odd duck among food distributors. Successful distribution is all about low margins + rapid inventory turnover + shrewd working capital management + rising sales leading to strong profit growth. WFM exhibits only one of these characteristics: rapid inventory turnover. The number I get from the annual report, which I find almost too good to believe, says that WFM’s annual sales are 30x its average inventory. This compares with 10x for AMZN and 15x for Kroger (KR).
On the other hand, WFM’s operating margin is more than 50% higher than KR’s and nearly triple AMZN’s. The excess of payables (what a firm owes to suppliers) over receivables (what customers owe the merchant)–and a key measure of operating strength–is about 1% of sales for WFM, while 3.6% for KR and about 15% for AMZN. In addition, WFM is no longer growing–the main reason, I think, the company’s PE has been cut in half over the past couple of years from about 40x to 20x (pre-AMZN bid).
WFM’s problem isn’t simply that its margins are too high to induce people to buy more than they do of what the company has to offer. Nor is it the assertion by some that WFM is very inefficient and should be making a higher margin than it actually does.
Rather, it’s that the current market situation is highly unstable, on several fronts:
–WFM-like offerings are increasingly available from less expensive chains like Trader Joe’s or even regular supermarkets
–having severely damaged the profits of incumbent grocers in the UK, deep food discounters from Germany–Aldi and Lidl–have both announced that their next target is the US. Even if the two are unsuccessful, increased competition is bound to mean lower prices
–AMZN has decided that the time for online food delivery on a large scale in the US has come. It’s also possible that it too is worried about the potential effect that Aldi and Lidl may have and has sped up its food distribution plans.
how will the takeover work out?
It’s hard to know. WFM’s management hasn’t covered itself in glory over the past decade. It needed to be bailed out from operating difficulties by Green Equity Investors in late 2008. And it doesn’t seem to have responded well to increased competition since. On the other hand, AMZN’s experiments in food delivery have had indifferent success so far. At the very least, though, AMZN brings a strong record in controlling distribution operations, expertise which WFM seems to me to need; WFM brings a brand name and the grocery equivalent of Amazon lockers.
My thoughts: the one thing I’m confident of is that food prices will generally be lower for consumers in a couple of years than they are now. I’d prefer to look for places where extra discretionary income can be spent than to try to play food directly.