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2017.10.04 Penn Wealth Report Vol 5 Issue 02

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10 PENN WEALTH REPORT VOLUME 5 ISSUE 02 04 OCT 2017 PENN WEALTH REPORT Copyright 2017. All Rights Reserved. INVESTMENT INTELLIGENCE Food & Staples Retailing How Amazon's Whole Foods Takeover will Change the Industry Food retail was one of the few areas with which Amazon was struggling—that is about to change It was the surprise merger of the year. The half-a-tril- lion dollar online juggernaut Amazon was taking out a $9.5 billion struggling organic grocer. On paper, it wasn't exactly a merger of equals or, based on the small (relative) amount of cash required for the buy, even that newsworthy; however, the shock waves that immediately began rippling throughout the food retail industry proved that yes, it really was a big deal. So why did Amazon make the offer, and why did Whole Foods so eagerly accept? First, let's look at the details. Amazon AMZN pur- chased Whole Foods WFM for $13.7 billion, which includes taking over the company's debt. Whole Foods will continue to operate its stores under the brand name and the com- pany's co-founder, John Mackey, will remain on as CEO—though he is fooling himself if he thinks he will have any semblance of strate- gic control. Mackey is a bit of an odd duck—someone you could imagine getting into the organic food business back in the waning days of the Carter Administration. Launching the company from Austin, Texas, he lived in the chain's first "store," bathing with the dishwasher hose (it was actually a commercially-zoned house). Following the merger, he told employees that he "dreamed about joining with Amazon" about a year- and-a-half before the actual event. He went on to use a number of courtship analogies that seemed to make the audience uncomfortable ("This is not a Tinder rela- tionship...."). Prior to the merger, Mackey accepted just $1 per year in salary, and the $8 million or so he will make from the deal is peanuts compared to other "winners of life's buyouts," as little Dickie Gephardt might have put it. Although still somewhat of a mod- ern-day hippie, he got into trouble with the left when he used the terms "fascism" and "Obamacare" in the same sentence. Interesting bird, indeed. Did Whole Foods need the deal? Up until last year, the face that came to mind with respect to Whole Foods' strategic plan was actually not founder John Mackey—it was co-CEO Walter Robb. Robb was the quintessential leader, helping navigate mine fields like the overcharging case of 2015 and the plethora of new entrants into the organic retail field. With Robb's vision and tenacity at the helm, most analysts didn't take much notice of Mackey's oddball statements and actions. (They did take notice, how- ever, when he was busted using the pseudonym "Rahodeb" on social media to attack rival chain Wild Oats.) But then, in November of 2016, the company flipped over the apple cart. In a surprise announcement, Whole Foods issued a press release stating that the company was doing away with the co-CEO structure. Instead of the co-founder riding off into the sunset, however, it was Walter Robb who would be cut from the team. It was the erratic Mackey who would "re-focus the organiza- tion's growth effort." Never mind that the chain grew from 12 to 464 locations during Robb's 25 year tenure in senior management. With the intense competitive landscape, from new players like Trader Joe's, Sprout's Farmers Market, and Natural Grocers, to old-school players like Wal-Mart and Kroger getting into the organic act, Whole Foods made an incredible strategic error in letting Robb go. Co-founder Mackey, in yellow shirt, back in 1984

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