Photo: SpartanNash
What’s behind the Amazon/SpartanNash deal?
Shares of SpartanNash rose 26 percent on Friday after the Grand Rapids, MI-based food wholesaler and retailer disclosed that it had entered into a commercial agreement with Amazon that includes warrants to acquire a minority stake.
Terms of the commercial agreement were not disclosed.
Under the warrant agreement, Amazon secured the rights to acquire up to 5.44 million shares of SpartanNash for $17.73 per share through Oct. 7, 2027, or an investment of $96.4 million if fully exercised, according to a SpartanNash regulatory filing. Share of SpartanNash closed Friday at $21.49, up from $17.02 at Thursday’s close.
Of the shares, 1.1 million vested at the start of the commercial agreement. The remaining 4.3 million vest once an undisclosed amount of gross payments are made through orders under the commercial agreement. If all shares are acquired, Amazon would own a 15 percent stake in SpartanNash.
SpartanNash, the nation’s fifth-largest food distributor, has been providing groceries to Amazon to support its grocery online delivery since 2016. It supplies approximately 2,100 independents, as well as some national chains. Its largest is Dollar General, accounting for 17 percent of revenues in 2019.
Speculation is the deal means SpartanNash will become the primary distributor to the new Amazon Fresh mainstream grocery concept.
BMO Capital’s Kelly Bania, in a note attained by MarketWatch, estimated the deal will more than double SpartanNash’s volume with Amazon and has the potential to significantly expand if distribution includes both PrimeNow and Fresh.
She wrote, “We estimate that like most contracts with [Amazon], margins may be lower than for independent customers. We believe that this is also a positive in adding additional diversification from [Dollar General] … although it may cause some stress in the short term.”
SpartanNash is also the largest food supplier to U.S. military commissaries and operates 155 supermarkets, largely in the Midwest.
The partnership comes after Amazon expanded its grocery delivery capacity by more than 160 percent in the second quarter and grocery pickup sites by three-fold as grocery sales tripled in the period.
- SpartanNash Company and Amazon Warrant Agreement – Securities & Exchange Commission
- SpartanNash’s stock soars after warrant and commercial agreements with Amazon disclosed – MarketWatch
- SpartanNash stock warrant offers company stake to Amazon – Supermarket News
- SpartanNash Announces New President and CEO – SpartanNash
- SpartanNash Announces Leadership Transition – SpartanNash
- Are Amazon Prime delivery shoppers disrupting Whole Foods’ stores? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Does the deal with SpartanNash offer any insights into Amazon’s evolving grocery strategy? Do you think an acquisition of a grocery distributor would make sense for Amazon?
Poll
BrainTrust
Raj B. Shroff
Founder & Principal, PINE
Ron Margulis
Managing Director, RAM Communications
SpartanNash is a piece in the jigsaw puzzle of Amazon trying to grow its presence in groceries. Whole Foods is pretty much self-contained, but if Amazon wants to open up more of its own-brand food stores (and do more with food online) it needs a properly functioning supply chain. SpartanNash provides distribution capacity which has already been proven under its existing agreements with Amazon. If Amazon does acquire the firm fully, it will be interesting to see what they do with the handful of existing retail stores that SpartanNash owns. There is an opportunity for Amazon to convert these into their own formats, thereby accelerating the rollout of the Amazon grocery store concept.
For less than $100 million, Amazon continues its investment and testing of food wholesaling and retailing. SpartanNash, with its 155 stores, provides Amazon with insights into a more traditional food retailer — such a perspective is not provided by Whole Foods or the latest Amazon banners.
However the real reason for the deal may be the many distribution opportunities and insights from SpartanNash’s wholesale operation – all acquired for significantly less than what Amazon typically pays for test market learnings.
Looks, feels, smells like Amazon is going vertical in the grocery business. And in the process giving itself the opportunity to be very flexible in how it executes that strategy.
SpartanNash stock, even after the bump last week, is pretty cheap. Its market cap of around $700 million is a little more than a rounding error for Amazon. And it gets a lot for the investment including, most importantly, access to the military markets through the SpartanNash MDV unit.
The complexity of the grocery supply chain is not easy to navigate — even for Amazon. This move demonstrates Amazon’s commitment to Amazon Fresh and Amazon Prime Now; thus bringing efficient grocery delivery to as many customers as possible. Sometimes it is more prudent to invest in an established network than to build it from scratch. And because this relationship has been working well since 2016, it seems to make tons of sense to me.
A deal like this continues Amazon’s plan to take market share in grocery. Expect to see more of these deals in the future where Amazon partners with experts in their field where Amazon can learn and expand their current business model.
It offers insight that Amazon is going full on into grocery. Bezos says he builds business strategies around behaviors that won’t change; humans will be eating food for the foreseeable future.
The investment offers them access to insight and a bigger seat at the table, allowing them to accelerate their learnings. A major reason an acquisition makes sense is they have a better safeguard to ensure that SN can support their scale, especially if they rapidly expand grocery. Without that access, it could be riskier to lean so heavily on an external supplier.
A very Warren Buffett strategy.
While there are lots of potential reasons for this move, I hope at least one of them is a serious effort to deal with the inventory management challenges in their grocery business. Sometimes shopping at Whole Foods online feels like a bingo game. You set up your shopping list, then hope some of your first choices turn up in stock. You just never know what will be out of stock — or when the out-of-stock items will come back. I suspect – and hope – that getting deeper into the supply chain to better manage in-stock positions could be part of the play here.
Amazon knows e-commerce. Amazon learned grocery retailing by buying Whole Foods. Now Amazon needs to learn the grocery distribution business. The wholesale grocery distribution business is not an easy supply-chain to learn. I have seen other retailers (like Target) decide to get into self-distribution of food and they struggle with learning the business, especially perishables. I have to believe this agreement for Amazon is a partner, learn, build process for them to become a self-distributing grocery retailer.
This deal does shed light on Amazon’s focus to lead in the grocery business. Amazon can tap into SpartanNash’s established distribution efficiencies to be a leader in this space.
Amazon’s stake in SpartanNash delivers on two critical dimensions of the company’s food strategy. It ensures Amazon has an outsized influence on SpartanNash’s future, from the soundness of its balance sheet to independence from Amazon’s competitors. Additionally, the partnership increases Amazon’s flexibility and range of strategic options. It develops a defensible growth strategy in the grocery sector that combines its native technological edge and massive consumer data with a seasoned physical operation that exposes grocery’s complexity beyond the immediate Whole Foods experience.
One side of me says this is a learning platform for a fully integrated Amazon grocery distribution vertical — Bezos prefers that Amazon control all aspects of its business if possible. The other side says taking stakes in multiple wholesalers could be a very cost effective way to secure large-scale grocery distribution capacity if the SpartanNash deal works out as planned. Either could work out very well for Amazon.
Grocery is a low margin, high turn business. Obviously the supply chain is at the core of successful grocery operations. The Whole Foods purchase was all the indication needed to know that Amazon is serious about grocery. This move indicates to me that Amazon’s long game is to compete with the national grocers in the country. This acquisition will provide them with core capabilities they need to build out a national grocery strategy, and give them insight into the supply chain they’ll need to scale that strategy. I would expect to see an expanded network of dedicated grocery fulfillment centers in the future, enabled by the capabilities they learn with SpartanNash.
From an operations point of view, grocery wholesalers and retailers have been notoriously weak. I doubt if there are many companies that are as operationally efficient as Amazon.
From a financial point of view this is an easy deal. There is almost no downside for Amazon. If it doesn’t work, they throw it away as a rounding error on the balance sheet. If it works, they develop a grocery oriented juggernaut that they can spin off (on a five to 10 year time frame) for a huge windfall for the stock holders.
SpartanNash already has many of the processes and mechanisms which will allow Amazon to move into new online grocery opportunities beyond Whole Foods. It is clear that Amazon sees that the online grocery market is growing and anticipates it to likely be very large. Buying a grocery distributor would be good for Amazon. Their lessons learned and industry knowledge would allow Amazon to grow into the category more quickly and with less risk. SpartanNash would be a great place to start.
Where has Amazon seemed weak compared to established grocers? Exactly in areas that SpartanNash has expertise and operations. It’s an easy move for Amazon for little money (to them) and sets them up for future vertical integration in the grocery segment. That’s a strategy that works well for Amazon historically, and it needs to grow its market share in grocery. What better way than to set yourself up for vertical integration? Since Amazon likes to test and experiment first, the deal’s current structure speaks to that approach, while in the future, they may expand, and it could lead to an outright acquisition. I am sure no one will be surprised by that!
Well, if AMZN has anything to do with it, these “stores” will soon become fulfillment warehouses. Check Whole Foods for a best example of how that’s going to go down. Now, is that a minus for these guys? Probably not, considering their environments, but for Whole Foods, it’s a huge miss to the customer. You can look for more of these types of acquisitions as AMZN expands into grocery.
The wholesale grocery feed distribution process is an extremely complex one, especially when you factor in organic, fresh and perishables, frozen, and premium prepared foods. This commercial agreement between Amazon and SpartanNash makes absolutes sense, especially as Amazon has expressed their intentions to expand their presence in the increasingly competitive grocery space.
Wholes Foods has its own mature self-sufficient supply chain operation, however, there are far more complexities as Amazon expands its Amazon Fresh footprint. With the announcement, there is the distinct possibility of Amazon acquiring SpartanNash. That would include SpartanNash’s 2,100 independent grocery retail locations they serve throughout the United States, as well as the 155 company-owned stores in nine states.
Our nation’s independent grocers with 21,000 stores, representing 25% of the retail grocery industry sales, $140B in annual sales, and 1% of the United States GDP, should stand on notice.
I would see major antitrust action if Amazon tried to acquire SpartanNash — they and UNFI are the two major national distributors to independent grocers as well as the national chains. The howl would be the same, and deservedly so, if Kroger tried to make that play.
We had a similar issue in the Office Supply industry last year — Essendant and SP Richards were attempting to merge, which would have eliminated all wholesale competition nationwide. That deal fell apart, thankfully.
Regardless of industry, extreme consolidation and vertical integration of distributors outright destroys SMEs and American manufacturing — and is not necessary for our economy’s transformation. I hope the Biden Administration puts teeth and enforcement back into our antitrust laws.
Amazon is aiming to put grocers out of business. They are following the money. Books, toys, electronics, and now grocery. Where is mister Sherman when you need him?
From Amazon’s point of view, this is a pretty good deal. For not a lot of money (for Amazon, anyway), it’s getting major reach in food distribution, over 150 supermarkets, the military market, and a solid addition of high-quality store brand capability. SpartanNash gets huge opportunities of being closely aligned with Amazon, opportunities that it has the ability to take advantage of. The grocery wholesaler is a major player and its first half numbers were quite good and showed substantial sales and profit growth. Time will tell if Amazon’s stake in the company works out since Amazon can sometimes be a tough company to work with.
Smart for Amazon to buy into SpartanNash and a close fit to Amazons ongoing MO — verticalization. Amazon has been eyeing grocery for such a long time, and this purchase helps lock that in further — perhaps even helping reduce some of the costs over time. This also impacts some of their competition as suggested, with the ability to provide preferential treatment to Amazon shipments. The question is really whether it will be a new driver for Amazon grocery products or just another way to reduce expenses from their last mile delivery to stay in the grocery game for the long haul.
SpartanNash has a dwindling wholesale operation and a dwindling retail operation. This is a company that has been bleeding for years (specifically the old Nash Finch side of it). Not sure how this is going to work out.
Amazon will end up finding using a third party does not work and will fail in grocery (ask Kmart) or Amazon will end up using the third party while they can’t do it themselves then build up the technology to successfully do grocery on their own and ditch the third party (ask Supervalu how that worked with Target).