What impact, if any, will Amazon.com, Inc. (NASDAQ: AMZN) acquisition of the
organic and natural grocery chain Whole Foods Market, Inc. (NASDAQ: WFM) have on its supplier United Natural Foods, Inc. (NASDAQ: UNFI)?
Pivotal Research's Ajay Jain commented in a research report that there
might be some "misplaced comfort" among United Natural's investors who are concluding the acquisition will be "mostly neutral"
since its contract to supply Whole Foods only expires in 2025. But taking a deeper dive into the deal and a look at similar events
in the past implies the acquisition is most certainly far from a "non-event." As such, the analyst maintains a Sell rating on
United Natural's stock with an unchanged $32 price target (check out Jain's track
record here).
Amazon Is Stronger Than Whole Foods
It wouldn't be overly difficult for Amazon to renegotiate pricing terms or terminate the contract with United Natural
altogether, Jain argued. In fact, grocery chain Albertson's
represented around 5 percent of United Natural's revenues and the contract terminated on September 20, 2015, rather than the
original contract end date of July 31, 2016.
Even if Amazon would choose to source a portion of Whole Foods' volume that is supplied by United Natural, it would still result
in a "great deal of disruption and operating inefficiency," the analyst added.
Moreover, Whole Foods doesn't have its own complete logistics network and that is where United Natural helped fill the void. On
the other hand, Amazon boasts tremendous logistic expertise.
Bottom line, Amazon is more than capable to demand pricing concessions and control greater portions of Whole Foods' supply
chains and based on the early termination of the Albertson's contract, it is "unlikely that the existing agreement between UNFI and
Whole Foods is truly binding." As such, the news should be viewed as "mostly neutral" for United Foods.
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