Amazon Should Buy These Five Companies Next
What was your favorite childhood board game? Any guesses on what my answer would be? I would bet a lot of you guessed that my favorite would be Monopoly…and you’re 100% right. Some find the game slow, boring, and full of rules that no one reads until you get into an argument. As a child, I found Monopoly to be stimulating, nuanced, and knowing the rules allowed for a competitive advantage. Now that I am thinking about it, Monopoly likely taught me more about financial literacy than any schooling up until the end of high school when I took my first accounting class.
As an adult, I’ve swapped Monopoly for strategic game theory and while it isn’t a recognized game, “Amazon 1+1=3” is always been one of my favorites to play.
With recent news of Amazon looking to buy several “splashy” companies during and after this post Great Lockdown recessionary period, it got me thinking about what exactly the internet retailer could potentially be up too over the next few years to strengthen their flywheel. Will they be super active or stay relatively under the radar?
If you follow me on some of my other social media accounts (links below), you likely saw a post where I referenced M&A activity from the last recessionary period. As you can see below, Amazon was not on that list, but that doesn’t mean they weren’t active (they had 16 total transactions).
Flash forward a decade and Amazon has grown their market cap about 15X to a $1.2T, which likely puts them as one of the biggest beneficiaries of what will happen in the next few years. What “will happen” or maybe “what is already happening” is a dream situation for the big to get bigger. This effect happens during most recessionary periods, but it also feels like this time is extra special for a company like Amazon.
“Amazon Movie Theatres”
Before dig into my list of five acquisitions that Amazon should make next, I wanted to give some love to the inspiration for this content. On May 11th, reports surfaced that Amazon was looking to acquire AMC Theatres. Since that news broke, the struggling movie theater chain has announced that it has substantial doubt that it can remain in business.
Amazon buying a movie theater shouldn’t surprise a lot of people because a few years ago they had previously looked at Landmark Theatres.
The thesis of Amazon buying a chain of theaters surrounds their interest in blending digital strengths with a physical presence. Physical movie theaters would give Amazon Studios a new way to distribute its feature films. Additionally, it would cater to Prime members by offering free or discounted movie tickets as a benefit of membership. Finally, it would give Amazon another use case for its Amazon Go technology (aka Just Walk Out).
5 Acquisitions Amazon Should Make Next
(Note: these will all be non-technology suggestions because I want to stick to my subject matter expertise)
Fashion-Heavy General Merchandise Retailer
The retailer you’ve been hearing in the news recently has been J.C. Penney’s, but I think this is the wrong move (taking out the price:value consideration). If you want a great perspective on the J.C. Penney’s acquisition, check out my good friend Chris Walton’s Forbes piece on the topic. That being said, I have been adamant Amazon buy another retailer since late 2018 and that name is Kohl’s.
My thesis starts with the existing Amazon and Kohl’s partnership. This partnership has grow over the years, from Amazon merchandising kiosks selling smart home devices to now having it be its biggest returns retailer. Fact is, Amazon likely knows more about the Kohl’s customer than Kohl’s at this point. Additionally…
- Kohl’s has a great merchandising mix that is heavy on fashion and athletic apparel, but also has a strong cross-section of other categories
- Kohl’s has already tested grocery merchandising with its Aldi’s partnership
Can you see where I am going with this idea? With Amazon buying Kohl’s, it can easily be positioned as the perfect “Target” killer, since Target would be crazy expensive now (but even more perfect than Kohl’s). I can see “Kohl-Mazon’s” being everything Target dreams it can be and done faster because Amazon will use its head-start on cashierless retail and mix-in data driven Amazon 4-Star merchandising and elements to help drive its hugely underutilized Amazon Accelerator “Our Brands” Private Label brand creation mechanism.
Kohl-Mazon’s is the future!
Additional names to consider; J.C. Penney’s and Target
If you think Amazon’s grocery ambitions end with Whole Foods Market, you’ve not been paying attention to recent news reports. Amazon has been working on opening up larger footprint Amazon Go-like grocery stores, but it has been overshadowed/delayed by COVID-19 economic restrictions. Additionally, Amazon will continue to grow its fleet of Amazon Go convenience locations. Finally, don’t forget about those re-imagined Kohl’s locations ;).
What does this all mean?
Amazon needs to become a grocery distributor through acquisition. This shouldn’t seem odd because Walmart actually acquired a grocery distributor McLane when it was getting into groceries two decades ago before they divested it to Berkshire-Hathaway after it learned the business.
Without an optimized logistics network to cost-effectively distribute groceries to stores, no grocery retailer will be successful. Distribution is everything. Amazon has a relationship with two well-known grocery distributors; SpartanNash and United Natural Foods (UNFI).
I prefer Amazon acquire SpartanNash because their relationship predates the UNFI one that was rolled in from the Whole Foods Market. SpartanNash is the fifth largest food distributor in the United States. They also are a leading distributor of grocery products to U.S military commissaries. Since I believe Amazon’s future in grocery stores will be in conventional merchandising, SpartanNash would be a better fit. Finally, SpartanNash owns around 160 grocery stores that can be easily retrofitted to speed up Amazon’s fleet of locations.
Additional names to consider; UNFI and C.H. Robinson
Athletic Apparel Manufacturer
After the Nike vendor relationship broke down, Amazon is back on the hunt for their go-to athletic apparel company. The company has struggled to create private label athletic apparel and that spurned Nike relationship will not be allowed to happen again…causing leadership to buy not partner next time.
The name I've suggested since late 2019 is Under Armour. The athletic apparel manufacturer has had recent struggles and ousted longtime founder/CEO Kevin Plank. Right now, Under Armour needs a visionary leadership team that can reinvent the brand’s upper-level ranges, but also have the scale and ability to execute growth of its lower and mid-level product ranges.
I think Under Armour lower and mid-level ranges fit perfectly with the Amazon customer. Additionally, I think Amazon can give Under Armour the deep pockets to go after league jersey deals, athlete endorsements, and partnerships that elevate the name again. Finally, a bonus reason is Under Armour does a ton of business with Kohl’s…there’s that name again!
Additional names to consider; Lululemon and Athletic Propulsion Labs
Pharmacy Benefit Manager
Yes, Amazon still wants into the pharmacy business. Yes, it already acquired PillPack. Yes, the future of pharmacy is online, but…
Amazon isn’t the most patient company when it sees a vision that consumers aren’t ready for yet. That means Amazon needs to go a step back to go two steps forward (cough cough Whole Foods Market acquisition).
The prize here is huge. Prescription drug spending is ~$500 billion in the US alone. The business model is horribly antiquated and ripe for disruption. Issue comes down insurers haven’t adopted PillPack to the point that makes Amazon feel like it’s impacting this massive industry. Amazon sees the aggressiveness of consolidation in this space, so they will realized they ultimately need a pharmacy benefit manager under its ownership to tip the scales.
The pharmacy benefit manager that Amazon purchases is Rite Aid. The pharmacy retailer owns EnvisionRXOptions with around 4M enrollees. This is relatively small, but it’s available where the larger pharmacy benefit managers are mostly owned by health insurers. Rite Aid also has ~2400 locations that could quickly get them to their Amazon Go fleet goals. I believe these locations are a great starting footprint for Amazon to learn the pharmacy business. Finally, Jeff Bezos was actually on the board of Drugstore.com in the 90s, so you know he has been salivating since then to get back into the business and disrupt it.
Additional names to consider; ???
Industrial MRO Distributor
I rarely talk about these types of businesses in my content, but I actually grew up around this stuff with my dad being an entrepreneur within the space. Additionally, I had a beverage portfolio client that sold to these MRO distributors in 2017–2018 within a larger multi-channel strategy. I even remember mentioning to that VP of Sales that Amazon would eventually make a run on an industrial distributor during a trade show in Indianapolis.
Which industrial MRO distributor makes the most sense? I think it’s Grainger.
The MRO distribution space is very fragmented ~$400B market. Believe it or not, Amazon already competing in the space, with its Amazon Business division that’s said to do about $10B yearly. With the acquisition of Grainger, Amazon would essentially double their market share. While Grainger does have about 600 physical locations, they do more than 50% of their business online.
What I think will be most attractive to Amazon is Grainger’s longtime connections with large industrial companies. This would help Amazon introduce them higher margin product divisions like AWS. Finally, many MRO products have higher unit economics and that also can help fuel Amazon advertising spends.
Additional name to consider; MSC Industrial Supply