Here's How Grocery Stocks are Reacting to the Amazon-Whole Foods Deal

Early Friday morning, Amazon.com AMZN made waves in the stock market as the company announced their plans to buy organic grocery chain Whole Foods Market WFM in a deal valued at $13.7 billion. As a result, both shares of Amazon and Whole Foods soared, with Whole Foods gaining over 27%, and Amazon rising about 3% in morning trading.

However, this did not bode well for other grocery chains. So far today, Wal-Mart Stores, Inc WMT and Costco Wholesale Corporation COST are down about 6% each. Shares of Sprouts Farmers Market SFM have lost 7%, while Target Corporation TGT is down 9%, Kroger KR down 13%, and Supervalu Inc. SVU lost 15% as of midday trading.

Heavy Competition in the Organic Food Market

Over the past few years, the natural and organic food market has increased dramatically. Consumers have been moving towards buying food that is organically grown, without pesticides or unnatural ingredients. According to the Organic Trade Association, the total organic product sales hit a new high of $43.4 billion in 2015, notes Reuters.

Since its launch in 1980, Whole Foods has been a leader in offering exclusively food that is organic and natural. It is the United States' first certified organic grocery, and as the company has grown over the last 30 years, it has popularized the organic food market. 

However, as more consumers have craved organic food items, more grocery chain companies have competed to get ahead and take advantage of this new market. National retail giants like Walmart, Costco, and Target have fought hard to be a part of this new market, adding organic food sections or increasing the amount of organic food brands offered. This has led Whole Foods to lose its ground to its competitors.

The Amazon-Whole Foods Deal

Because of the increasing competition, Whole Foods stock has suffered. The company came under pressure earlier this year from activist investor Jana Partners and money manager Neuberger Berman as each told Whole Foods to either sell itself or merge with another grocery chain.

Amazon has tested its own grocery services recently with the launch of Prime Fresh, a $14.99 per month grocery delivery service. Prime Fresh appeals to consumers because of its low prices, which Amazon can afford based on the company's profits made through its online sales.

Whole Foods has been a staple chain in the growing organic food market. Amazon's buying of Whole Foods suggests that Amazon is dedicated to a full investment into grocery services and the organic food market (also read: Will the Trump Administration Block the Amazon-Whole Foods Deal?).

Bottom Line

While Amazon's buyout of Whole Foods has shaken the stocks of grocery store chains and retailers alike, these giants will not go down without a fight.

TGT and SFM remain a Zacks Rank #2 (Buy). While Target has some growing pains ahead of it, Sprouts expects positive year-to-year earnings growth for the current year, with seven upward revisions in the last 60 days compared to none lower.  

WMT, COST and SVU remain a Zacks Rank #3 (Hold). Both Walmart and Costco directly compete with Whole Foods' grocery business and Amazon's e-commerce product segment. Our current year consensus shows positive year-over-year earnings growth for each company.

KR, however, is a Zacks Rank #4 (Sell). On Friday, Kroger is the top decliner in the S&P 500, and the company fell 19% Thursday after its sales forecast was lowered. Our current year estimate shows year-over-year earnings decline of over 4%, with four downward revisions in the last seven days.  

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