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Quite how the retail landscape is going to be changed by the Amazon and Whole Foods deal is something we shall find out but the stock market had a pretty clear verdict, the consumer would benefit. The combination of firms would produce greater competition in the marketplace, greater competition being what does in fact benefit us consumers. As people fight harder for our dollars then they have to offer us ever better deals. That’s why the stocks of competing retailers fell so much on the news:
Elsewhere, Amazon’s deal to buy upmarket grocer Whole Foods Market crushed retail stocks, raising fears about competition for the sector. Jefferies analyst James Grzinc said the deal will likely have far-reaching consequences for the global grocery industry. He also said the share price plunge suggested investors are concluding that Amazon will use the deal as a platform “for a frontal assault on the category and strongly pressurise legacy players in the process”.
Note that on the business pages “competition” is used as a bad word. Businesses which make good profits are those which don’t face too much competition, which have market and thus pricing power. This is the same thing that Warren Buffett is referring to when he talks about a business having a “moat,” a method of defending its position. Economists, and we out here, think competition is instead a wondrous thing, it forces down profits and prices to our benefit.
The stock market’s reaction was extraordinary. In the US, Walmart’s valuation fell by almost as much as the sum Amazon is paying to acquire Whole Foods. In the UK, Tesco was down 5% and Sainsbury’s 4%.
It’s not just the American market either, the effect is expected to cross the Atlantic.
The stocks of traditional grocery stores like Kroger were clobbered Friday after the deal was announced. So were Walmart and Target, which made big moves into groceries in recent years and now depend on food for a huge chunk of their sales.
The damage didn’t stop there: Food companies themselves, like Hershey and Campbell Soup, also slumped because of investor concerns that Amazon will do for their products what it does for everything else — cut prices ruthlessly.
From our point of view, either as economists or consumers, this is all just fantabulous of course. Note that markets aren’t always right but we do think that they’re efficient processors of information into prices. Of course, there are always those who don’t quite get the message:
Up until now, the mainstream antitrust establishment has been pretty quiet about Amazon, no doubt because its visible conduct fits awkwardly with current ideas of what should be illegal. The Whole Foods acquisition could change that, if for no better reason that it represents a new level of audacity. Though Amazon has acquired hundreds of other firms in the past, some big and many controversial, never before has it bought a significant brick-and-mortar operation. Over the years, as its critics have raised increasingly urgent alarms and elaborated on the firm’s history of fairly nasty aggression, what’s angered them most have been Amazon’s tentative forays into terrestrial stores of its own. They seem to confirm a deliberately predatory, monopolizing strategy: Amazon kills off brick-and-mortar retail competition through desperation prices, only to take over those rivals’ physical presence as soon as they are gone.
The point here being that we’ve no problem at all with people cutting prices until the competition cries “Uncle!” We do care if they then turn around and raise them again, if they exercise their market power, once they’ve done so. But then if they do that’s when we ding them for abuse of a dominant position. While they’re trying to create it we’re just overjoyed at the benefits that flow to consumers.
The stock market marked down the companies which will have to compete with the Amazon, Whole Foods combination. Thus the markets believe that the combination will be beneficial to consumers.