Amazon’s Planned Purchase of Whole Foods May Not Trip Costco

Stock prices of grocery retailers in the United States plunged after Amazon (NASDAQ:AMZM) announced a $13.7 billion purchase of Whole Foods Market, Inc. (NASDAQ:WFM) but the selling may have been overdone in the case of Costco Wholesale Corporation (NASDAQ:COST), which caters to a different clientele and business model than its health-oriented and pricey rival.

Despite the differences between the two successful grocery chains, Costco’s share price plunged $12.95, or 7.19%, to close at $167.11. The biggest threat Amazon’s acquisition of Whole Foods may present could be to grocers such as Wal-Mart (NYSE:WNT) and others that are trying to develop either an online or personalized home delivery service that Amazon likely will implement if it completes its purchase.

The fallout from the acquisition announcement slammed publicly traded big retail grocery companies such as WalMart, falling $3.68, or 4.65%, to finish June 16 at $75.24, and The Kroger Co. (NYSE:KR), which slid $2.27, or 9.24%, to close at $22.29. Also down for the day were Sprouts Farmers Market, Inc. (NASDAQ:SFM), which sank $1.41, or 6.29%, to $21.01; Casey’s General Stores, Inc. (NASDAQ:CASY), which only slipped 84 cents, or 0.77%, to $108.00; and SuperValu Inc. (NYSE:SVU), which tanked $0.54, or 14.36%, to $3.22.

The worst of the fallout may have missed Casey’s General Stores, Inc., because it operates more than 1,800 convenience stores, not super markets, in 14 Midwestern states that primarily are based in Iowa, Missouri and Illinois. As a result, CASY may be less vulnerable to the threat of Amazon buying Whole Foods.

Investors reacted favorably to the prospects for Amazon by bidding up its stock $23.54, or 2.44%, to $987.71. Whole Foods, a grocery chain that exclusively sells food with no artificial preservatives, colors, flavors, sweeteners and hydrogenated fats, jumped $9.62, or 29.1%, to $42.68.

The Whole Foods’ share price actually rose above the $42 a share that Amazon pledged to pay. The market’s response indicates investors may be expecting a potential rival bid that would top what Amazon offered.

The acquisition announcement follows two years of Whole Foods’ enduring a falling stock price and calls from activist investors for the company to make changes to improve its margins, distribution, technological capabilities and operations. John Mackey, Whole Foods’ co-founder, initially resisted those moves but ultimately relented after some of the changes he pursued failed to appease the activist investors or return the company to its glory days of strong growth and margins.

Bryan Perry, the editor of the Cash Machine investment newsletter, said he expects Costco to thrive regardless of whether Amazon completes its acquisition of Whole Foods. Grocery stocks and real estate investment trusts (REITs) with grocery store properties generally came under selling pressure after headlines of Amazon’s billion buyout offer but he expressed optimism Costco would rebound.

“Clearly, Amazon.com wants to expand their direct consumables offerings and buying a premium brand like Whole Foods is a big step in that direction,” Perry said. “With that said, while it is understandable that shares of Kroger & Co., Sprouts Farmers Markets and SuperValue (SVU) are getting sold down, there would seem to be some unwarranted shedding of stocks that have uncorrelated business models, such as Costco Wholesale, where the goods offered have little in common with those inventoried by Whole Foods. Just the idea of Amazon.com moving further into the perishable and grocery business has the entire sector in a ‘sell first, ask questions later’ mode.”

Paul Dykewicz is the editorial director of Eagle Financial Publications, editor of StockInvestor.com and DividendInvestor, a columnist for Townhall and Townhall Finance, a commentator and the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a Foreword by legendary football coach Lou Holtz. Visit Paul’s website at www.holysmokesbook.com and follow him on Twitter @PaulDykewicz.