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Kroger should challenge Amazon and make Whole Foods a sweeter offer

  • Amazon has announced plans to acquire Whole Foods for $13.7 billion — a deal that's expected to close in the second half of 2017. Unless, of course, a rival bidder steps into the picture.
  • One benefit for Whole Foods in considering teaming up with rival grocery chain Kroger: big data analytics, which Kroger is known for, Loop Capital wrote in a Wednesday note to clients.

Watch out, Amazon. Kroger could give Jeff Bezos a run for his money.

At least that's what one analyst is saying, issuing a note to clients Wednesday morning explaining why a competing bid by Kroger for its rival grocer Whole Foods makes sense.

This, after Amazon announced plans last Friday to acquire Whole Foods for $13.7 billion — a deal that's expected to close in the second half of 2017. Unless, of course, a rival bidder steps into the picture.

"The offensive play would make Kroger by far the largest natural/organic food retailer at over $30B in category sales and would generate significant synergies both financially and in mind-share," Loop Capital's Andrew Wolf wrote in a note to investors.

"In turning around Whole Foods, both Amazon and Kroger would bring strong capabilities but ironically, Kroger's leadership in big data analytics in grocery could arguably be the most critical," Wolf said.

Loop explained why a competing bid for Jeff Mackey's Whole Foods would have merit both "defensively" and "offensively" for Kroger. The firm maintains a hold rating on Kroger's stock but has lowered its price target to $25 per share, citing lower valuation in the grocery sector overall. Kroger shares closed Tuesday at $22.38 apiece.

While Amazon has said it plans to acquire Whole Foods for $42 a share, Wolf said a $50-per-share bid for the grocery chain would be "about neutral" to Kroger's earnings.

Additionally, Kroger's store exposure to Whole Foods is modest, Wolf said, with less than 10 percent of Kroger's store base located near a Whole Foods outlet. Hence, limited overlap and little competition to steal shoppers.

"This modest exposure to Whole Foods would limit the potential fallout from Whole Foods turning around under Amazon's umbrella," Loop Capital said.

Another benefit for Whole Foods in teaming up with Kroger: big data analytics.

"Kroger's use of big data analytics ... continues to set it apart in the US grocery landscape," Wolf wrote. "We believe this critical capability would benefit Whole Foods immensely as it is in the early stages of its own journey to price relevancy in a dynamic US food retailing market."

It remains to be seen how the Amazon-Whole Foods buy will pan out, but a ripple effect is already impacting numerous rival retailers.

Many grocery and retail stocks tanked last Friday, as shares of Whole Foods soared. Kroger declined more than 14 percent that day, and its stock was falling about 2 percent Wednesday morning, still trading in red territory.

To be sure, Whole Foods CEO Mackey told employees at a town hall last Friday that meeting with Amazon executives in Seattle was "love at first sight." But the two remain "engaged," like a couple, he added, still waiting until their transaction gets regulatory approval.

Investors still appear to be speculating that another suitor is waiting in the wings. Whole Foods shares continue to hover above the price Amazon plans to pay, a sure sign investors are betting on a sweeter bid.

Recently, Whole Foods shares changed hands at $43.09, up less than 1 percent.

Last week, Barclays put the odds of a successful Whole Foods-Amazon pairing at about 60 percent. The analysts weren't concerned about a regulatory snafu, instead, they think there is a 40 percent chance of another bid surfacing.

Kroger declined to comment on this story.

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