Panic over $13.7bn Amazon deal is buying opportunity

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Panic over $13.7bn Amazon deal is buying opportunity

Amazon has already changed the way we shop, and may be about to do it again after spending $13.7 billion (£10.7 billion) on US bricks-and-mortar chain Whole Foods. The move caused widespread panic across the global retail sector, but already the selling looks overdone.

Predictably, Wal-Mart plunged more than 6% at one stage Friday, Costco Wholesale sank 7% and Target as much as 12%. Over here, when the news hit at 2pm, Sainsbury's slumped below 250p for the first time since early January, while Tesco hadn't traded below 170p since September 2016.

The rationale for this deal is clear. Not only is there an obvious boost to the Amazon Fresh grocery delivery line, but the US tech colossus also gets access to Whole Foods' 11 regional distribution centres and 440 US stores.

According to research, 40 million US households live within five miles of a Whole Foods store, and 75 million Americans live just three miles from the upmarket health chain. That's perfect for Amazon's fast delivery service.

And while Whole Foods has just nine stores in the UK, it's easy to see why local retailers are getting twitchy.

Whole Foods bought the Fresh & Wild branches in 2004 and opened its flagship Kensington store three years later.

Big worry here for the UK's big shopkeepers – Tesco (TSCO) and Sainsbury's (SBRY) – is that aggressive Amazon founder and chief Jeff Bezos will want to do to bricks-and-mortar guys what he's already done to online.

There'll be plenty of money to throw at it, too, which could put domestic supermarkets, still recovering from a bruising price war with German discounters Aldi and Lidl, at further risk.

In an industry where margins are already paper thin, shareholders are right to be worried about a repeat of that encounter and further food price deflation. Perhaps the purchase of Argos by Sainsbury's last year was not as crazy as many at the time believed.

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There may be some reprieve for Morrisons (MRW), however. The UK's fourth-largest supermarket chain struck a deal with Amazon early last year to deliver groceries to the US firm's Prime Now and Pantry customers, part of a series of capital light growth opportunities.

"The combination of our fresh food expertise with Amazon's online and logistics capabilities is compelling," chief executive David Potts said at the time.

Indeed. Morrisons' share price has risen 30% since and currently sits not far off a three-year high. By comparison, Sainsbury's is down 6% and Tesco 1%. There's talk, too, that Amazon might take over Morrisons at some point, speculation that might at least underpin the share price.

Check out Ocado (OCDO), too. Caught up in the sell-off Friday, it's 10% higher Monday at prices last seen a couple of weeks ago.

Elsewhere, Sainsbury's is up 2.6%. Feeling here must be that any impact on prices this side of the Atlantic will happen soon, and there will be much conjecture about the size of any impact.

Tesco sticks out, however. That it has failed to attract much buying interest, even at multi-month lows, gives a clue as to where the market is placing its bets right now.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.