Amazon (AMZN) announced on Friday that it was acquiring Whole Foods (WFM) in a move to extend its reach into Grocery.
We have long said that Grocery is one of the last areas of e-commerce penetration and although many have tried (Ocado for example) most have failed with a pure play e-commerce offering. This is mainly due to the complex nature of the supply chain and the fact that a large part of the product base is perishable.
We have followed a number of “foodtech” businesses for the last 5-10 years and competing with the integrated nature of traditional store based retail has been very hard.
The market view is that Whole Foods give Amazon access to both local distribution hubs (historically called stores) and a very integrated and unique supply chain. Whole Foods has a strong presence in North America and a few stores in the UK but has great coverage in the US in demographically richer neighbourhoods (Whole Paycheck).
But for FMCG brands the creation of Amazon as a retailer and a potential competitor will be an interesting area to watch. We suspect a number of brands may have to increase there own technology investment and this might be based on so called “acquihires” of struggling startup in the sector.
Good news for brands – but not fantastic news for investors who have paid high multiples to fuel the burn within a number of these companies.
Long term we think this is great for the consumer, great for Amazon shareholders and fantastic for brands that have well developed e-commerce capability – allowing them to leverage the investment that Amazon is making in this sector. Not great for Walmart though!
Blue Apron (www.blueapron.com) one of the US leading meal kit companies filed its S-1 on Friday giving us some insight into the burgeoning meal kit delivery market.
Although we like the sector, in general, we still feel that churn is the major enemy within this area. Working on around 30% gross margin is fine but 3-year cohort data shows $939 of LTV. This offers around $280 dollars of contribution before marketing costs.
2016 marketing costs seemed to come in around $144 per customer making a post-marketing contribution (before overheads) of $136. This is spread over 3 years so the cohort is delivering $93 per annum, giving marketing payback at around 18 months.
Everyone in this sector has raised vast amounts of investment and with around $745m in revenue in 2016 Blue Apron is definitely a business of scale. Losses have narrowed but to keep the churn rates in check the business needs to keep investing heavily in marketing.
At Movefresh we are obsessed by Amazon – they are a great role model for thinking long term (this isn’t that popular in the current economic environment)
I am still amazed that sophisticated investors can’t get their head around Amazon as a business and investment opportunity. Firstly, having been born around the dot com boom, it is certainly associated with the many businesses that failed within this cohort.
Secondly, investors really struggle to understand businesses that can continue to find ways to effectively invest their cashflow/profit. Many investors look at Amazon as a business that is “marginally” profitable, I see a business that can actively invest in the future and give bigger returns to shareholders who are willing be part of that.
I always recommend reading the Amazon letter to shareholders that have been published annually. The 2015 shareholder letter makes some interesting reading.
1. “The fastest company to reach $100 billion in annual sales”
2. AWS reached $10 billion pretty quickly too
3. “Customer obsession rather than Competitor obsession”
4. “Willingness to fail”
5. “Patience to think long term”
All of this is contained in the first paragraph – it is totally clear that that the business knows how to invest its cash flow.
They also included a copy of the letter from 1997 (reprinted from the 1997 Annual Report). They haven’t really changed their strategy since this original letter – something that I admire greatly.
In early 2017 we are launching Prana Protein, this is one of our first steps away from dieting into the broader health and wellbeing category.
We have spent quite a bit of time this year looking at sports nutrition – a sector we have followed since starting Diet Chef in 2008. The sector is definitely in growth but we feel that the lifestyle consumer is badly served. Most online competitors have pushed the market into volume led discounting which does mean that it is very difficult to compete for a new entrant.
Our focus on wholefood nutrition (which has been growing strongly in the US for the last 18 months) is somewhere we are much more comfortable with. Not only is there a large megatrend towards “free from” we are also seeing demand for more natural protein sources (a lot of which taste terrible) so drawing on this we will make sure the brand appeals to the lifestyle consumer within this segment.
We have made very good progress with Diet Now this year and the business is now contributing after the initial investment. Our growth plans for this brand take us further into Europe.
The future of convenience shopping is here and its called Amazon Go.
Amazon is one of our top technology holdings and we continue to be very bullish about the future of Amazon.
Amazon Go allows the vision of the future with no checkouts, no baskets, no staff, just great technology. All you need to get access is a simple barcode on the app. Everything else is done automatically.
Grocery shopping will never be the same – launching in Seattle in early 2017 this leapfrogs most other convenience retailers.
Although this is quite a heavy hitting title, many businesses say this but few actually believe it. Investment in the future sometimes is quite short term.
Building great brands takes a long time and investment sometimes takes years if not decades to recoup.
By building a balanced portfolio of brands that are at different lifecycles we can use the associated cash flows to invest in the future and for the long term. We are long term shareholders and our focus is to be measured in decades not quarters.
Marketing investment is frequently curtailed if immediate payback is not available (on your first order for example) but being able to take a longer term view allows you to really benefit from the long term value that customers see in a great product.
We see marketing as an investment – not a cost – and just like buying companies that require investment for growth – we want to ensure that marketing is measured as an investment. We are very analytical but don’t only listen to the numbers, we take multiple data points to measure our marketing investment.
A typical by-product of believing marketing is an investment is that we know that not every activity that we carry out will work, but we are relaxed as long as the majority work!
Asda has reported the worst quarterly drop in sales a massive 7.5% in the last 3 months.
Let’s just sit back for a moment or two and think about this. All the major “multiple” retailers are in decline apart from Waitrose. That is a seismic shift in consumer behaviour, multiple retailers are being attacked by discounters, convenience and online in one of the biggest shift in consumer behaviour since supermarkets first appeared and impacted local high street stores.
Change in market share
So if you are an FMCG brand trying to find growth the worse place to be is within multiple retailers. Your choice is the unpredictability of discounters (smaller range) or stick with volume in multiples and expect exceeding price and margin pressure.