Amazon vs The Competitive Conundrum

Everyone’s heard the now well-worn excuse “it’s different this time” given to explain away fundamental logic or business principles when it comes to anything that is lumped into the “disruptor” category.  Anything “Tech” or “The Valley” centric used this almost as an invisible force field to protect any and all criticism of its business models. All that’s mattered over the years seems to have been: Get funded, Get listed, Get paid, Get out. Cha-ching! Rinse, repeat. If the company folded? Who cares, they got theirs. (e.g., early investors, employees, and founders et al.)

But that’s not working as well as it used to and for proof just look at the IPO stable of the last few years for clues.

With that said there has been one model that has been working splendidly, that model of disruptor applies directly to the current mega-cap’d companies where one could arguably suggest actual physical cash is what’s being burned out the rear of its rockets to propel both it, as well as the business itself, into orbit.

Personally, I’m a fan of these companies offerings. I’m also a great fan of their determination to do things others seen before as just pipe-dreams. Tesla™ has built an electric car with styling inside and out that competes with any modern luxury sedan. And before it? Golf carts looked and ran better than most offerings prior. Amazon™ of course changed the game of retailing and needs no further explaining. But something has changed significantly over the last 5 years that has disrupted another far more important aspect of business in my opinion, and it is this:

Fair competition, as in level playing fields, for something seems to have gone awry and I believe it’s not for the good.

A few weeks back I wrote an article where I raised my concerns and expressed it via the premise: What’s the difference between this and government sanctioned dumping?

I began asking the question because something just wasn’t sitting right with me as I looked over the business landscape. I did it, as always, because not only was no one else, but rather, it appeared as long as “everyone was getting theirs” who cares what pestilence it might leave in its wake. Here’s a sample. To wit:

“Free market capitalism is far too important as to just stand back and allow it to be bastardized, let run amuck, unfettered, with no considerations of the damage it can instill when not properly employed, or understood. But what at times may be far worse – is something thought of as one thing, then allowed to promulgate under that moniker instilling a “hands off – or don’t question” force field to be employed, while all the time it has morphed into something dangerous, or destructive and an anathema of its original intent or meaning.”

It would appear I was, once again, ahead of the curve for I was simply dumb-founded when the news broke this past Friday that Amazon would acquire Whole Foods™ for some $13.7 BILLION in an all cash transaction. This was at a premium of around 27% over the previous days close. All pretty mundane stuff when seen through the lens of typical M&A deals. But that’s just it – this ain’t no “typical” M&A acquisition from my perspective. I believe it to be the harbinger of the warnings I expressed earlier. Let me explain.

A background note: When it comes to the “food” business, I have a working understanding far more acute than most because I spent a career in it in one form or another, and at all levels. Just to give an idea; not only have I worked, managed, and owned one. I was one of the first in the country to formulate, and write, a corporate working HACCP program based on NASA protocols for USDA compliance of food safety when the program was launched.

I know to many it sounds like: “Big deal, so what does that mean?” Let’s just say, if a company of any size doesn’t follow – to the letter – of what that plan states? Or, has an issue that can’t be shown – as in proven – via the protocols of their HACCP plan to have been contained? You can be out of business overnight with recalls, fines, liabilities and more. Said differently: It’s your operation and procedures bible for any food business mandated, and enforced, via the USDA’s Food Safety and Inspection Service aka “The Food Police.” And yes – they do have badges!

So why do I even include the above many are asking. Well, it’s because of this point: When you hear that supermarkets and such work on razor-thin margins many at first blush think “Yeah, wouldn’t know it by looking at my grocery receipt, it’s always going up, up, up!”

But I’m here to state, in fact, that “razor-thin” is an apt descriptor. It’s a volume business and competition for your food dollar puts the law of supply, demand, and affordability via the competitive model to keep those low margins in place, and in check. i.e., It’s not an easy business to start, let alone, stay in.

Running against that model has been the Whole Foods model, which is basically the “whole paycheck” outlier of the industry. But as I stated – it’s an outlier when compared against the industry as a whole. i.e., It’s for those who feel comfortable possibly overpaying rather than being price sensitive. For what ever the reason they shop there because they believe – it’s worth it. Regardless of any other metric and that’s perfectly acceptable and appropriate in a free market.

But there’s now a twist entering this equation, and it’s this:

Amazon is now going to purchase them, and will by all interpretable media coverage I’ve read so far, is going to move that “whole paycheck” model into a more bulls-eyed approach toward traditional retailers. e.g., The Walmart™, Kroger™, et al. Or, again said differently: Amazon is now going to disrupt the supermarket model and industry much like it did (and still does) traditional retail.

And there lies the rub for the question that must be asked is: How can it afford to do it? Hint: Look at its current stock price.

This is not the only “twist” happening within the markets today, and from my perspective – it’s not only twisting business logic into something grotesque, it’s also twisted common sense in much the same manner. So much so, I believe it not only be antithetical to free market capitalism, but out right dangerous.

To be clear: This is not an anti-Amazon rant. If I were Jeff Bezos, in his position, I would probably be doing the same thing if the market allowed it. But the question is: Are we talking market? Or “market?” That is a difference with a very big distinction that must be addressed today. And nobody seems to quite understand the growing implications if it continues on its apparent preset course.

Let me pose a question to anyone who either owns, or is responsible for any company or business’s welfare; along with the welfare of their employees the following:

How is it right, or ethical, that a company such as Amazon is able to purchase another company, in a differing sector, and bring about competitive pricing structures unavailable and unsustainable to the companies currently battling within that structure made possible only by the largesse of central banks outright purchase or “bulls-eye” of a company’s stock or bonds whether directly or via their anointed representatives?

I use The Swiss National Bank™ as just one example but they’re all doing it in one form or another.

This – is – the issue of the day for free markets everywhere. Large or small. And especially small business. Why?

So adulterated and perverted have the principles and workings of business fundamentals become the only way not to see it (or admit it) is to not look at it. But much like pornography, I don’t need to be told what I’m looking at when I see it, to know if it’s pornographic or not. And the “dirtiest” moving picture of Friday that was broadcast for all to see was the stock price movement of Amazon and the resulting moves of the now “non-bulls-eyed” competitors. Again, to wit:

(Source)

The above are just three of the competitors within this market, and look at the market cap worth $10’s of BILLIONS of dollars erased in a day on the announcement. But what happened to Amazon’s? Because, what would always seem as the normal course would be for a company that is buying another that their valuation would take a hit. After all, they’re the one spending all the money, right?

Well, let’s just say another thing has entered the “It’s different this time” perversion of all things business or fundamental. Again, to wit:

(Source)

Want more proof? Here’s a chart provided in the ZeroHedge™ article “Grocery Stores crash after…” To wit:

See any thing that looks a little “odd” here? Like, maybe, there’s something out-of-place? You know, like the difference between free markets, and central bank captured “markets?” Or is it just me?

At the pace we are currently going, and in the manner it’s also following, the question that must be asked (because you have people asking it right now and are about to act on the above as empirical evidence that this is the new way to do “business”):

If you are one of the fortunate currently to still have a “bulls-eye” on your stock ticker: Do you now actively try and buy every market competitor available? Because, worry not about cost or profits for you’ll be rewarded with higher valuation near instantaneously and the leaders of that market who don’t have that coveted “bulls-eye” will be struck mightily with a possible crippling sell-off in their market cap possibly to the point of where the term “competitor” applies momentarily. See Amazon’s latest entry for further clues or possibilities.

Don’t gloss over the above because, as of now – this is the currently funded perversion of business central bankers have wrought. Amazon is just the first to show the consequences of that action in real-time. And now – there’s precedent.

If you think others aren’t right now contemplating something similar I have some ocean front property in Kentucky you can have at a discount.

In less than a day Amazon’s market cap went up in value basically covering the entire purchase price. So, with that as a backdrop why wouldn’t others do the same and just go-for-it? I’m not encouraging it (and believe it’ll come back to haunt in ways that will terrify many a current BTFD’er of today) but with Amazon now showing the results of such an action? Many are thinking right now: “Why not? Do you know what that’ll do if it works for my “golden parachute?!”

The issue here is also – what does it do to the market that relies on a stable pricing structures and product availability such as the whole food complex?

If BTFD’ers “bulls” (and central banks are the Apis bulls of the herd mentality with unlimited resources to just buy more, or cover for any losses via their “printing press”) shun the current market leaders making them appear as “unattractive” investments for the market, but yet buy “horns-over-hooves” more shares in the likes of an Amazon or other such equivalent in a similar scenario – Is that a fair market? Or how about this: Is this a new way to pervert the “market” and market sectors even more for other gains? Think about it.

Mom and pop shops don’t have access to such, nor most medium sized, let alone the larger one’s such as any noted above. i.e., If you ain’t the Amazon equivalent of their portfolio – you ain’t nothing. Period.

Just such a scenario sets up the conditions for not just crippling the completion (i.e., theres a run on their stock value.) But you may crush your future competitors before you even enter the market place! Again: Is that a fair competitive advantage? Because the only way one has that advantage – is via central bank largesse. And if they haven’t picked you?

See the above charts for clues.

© 2017 Mark St.Cyr