The Whole Foods Deal: Three Factors Limiting Amazon's Power

There are limits to how much pricing power Amazon.com, Inc. AMZN can wield if it tries to subsidize its grocery goods in order to crush its competitors the usual way, Bernstein analyst Brandon Fletcher believes.

The Federal Trade Commission this week approved Amazon’s acquisition of Whole Foods Market, Inc. WFM. The retailer, which closes the $13.7 billion deal Monday, listed a full range of items that would immediately see price reductions.

Whole Foods Customers Don’t Buy Soda Pop

In an analyst note, Fletcher listed three things that limit Amazon’s ability to try and take down Wal-Mart Stores Inc WMT, Target Corporation TGT, Costco Wholesale Corporation COST and Dollar General Corp. DG

Different demos: “The quinoa elite and mainline groceries serve different customers and don't directly translate.”

Related Link: Amazon-Whole Foods Deal Details Shouldn’t Surprise Anyone

Range of reduced items are not that broad “This is more like a sale than a permanent roll back of 'whole paycheck' pricing,” he wrote. “Walmart just plain does not sell the same items nor serve the same customers.”

Grocery logistics are notoriously tricky. “(It) will take time to integrate in a way that lowers costs enough, broadens assortment enough, and increases locations enough to destroy the scale advantages. “

Over-Subsidizing = Destruction

“Yes, AMZN can subsidize anything, but at some point if their actions are value destruction and not disruption, the narrative may change as you can disrupt infinitely, but destroy only to the limits of the balance sheet,” he said.

“We think that speed limit leaves the strongest incumbents largely unharmed.”