Over the past year, there have been quite a few headline-grabbing, wave-making deals where it has become clear that the “tech world” is increasingly advancing on “old world” real estate territory (with some notable “reverse-takeovers”). Think: Walmart buying Jet.com (2016), WeWork buying Lord and Taylor’s flagship store (2017), Walmart buying Flipkart (2018), etc. But none has created such a tsunami as Amazon buying Whole Foods.
Until last year, the disruption of the bricks-and-mortar retail sector was mostly visible in the non-food space, with notable bankruptcies of for example Borders, Sports Authority, Toys R’ Us, and sharply falling prices of retail real estate (this price-correction is not yet accurately reflected in real estate valuations, but the public market provides better evidence of what is still to come: retail REITs are down some 45 percent from their 2016 highs). The advance of tech into retail has dominated industry conferences and spurred significant lobbying against what is often perceived as unfair competition (with even the Tweeter-in-Chief lashing out against Amazon).
On June 16, 2017, big tech formally announced its presence in the grocery retail space, an industry that generates almost a trillion dollars in revenue per year. With Amazon buying Whole Foods, a high-end grocery that seduces taste buds while emptying wallets, online retail has now firmly established a foothold in physical U.S. retail territory. This unprecedented move excites the tech-savvy, scares retail investors, and has unleashed further speculation about the future of retail real estate (of course, there are still optimists out there).
The reasons for Amazon’s acquisition of Whole Foods are manifold, but buying direct access to America’s upper-middle class is certainly high on the list. After all, Whole Foods is known for being strategically located in areas where median income is high and unemployment is low. Whether you like it or not, this is the demographic that makes retailers salivate — not enough time, but plenty of disposable income. Indeed, real estate developers and investors are often watching Whole Foods (and Amazon) not just because of their potential threat to existing retail businesses (quick reminder: a decade ago, retailers worried about “Walmart coming to town,” how times have changed…), but also because of their aptitude in selecting the next store location. In case you’re curious, here are all U.S. locations of the more than 450 Whole Foods stores, and a close-up view of New York (click on the maps for a more detailed view):
As shown by the simple overlay of of median household income on the map, the location of high-end grocery stores such as Whole Foods may provide a pretty good indicator of (hyper)local economic activity, neatly summarizing the demographic profile into one simple binary indicator — is there a Whole Foods nearby, yes or no. But Whole Foods is just one of many grocery stores. What about Stop & Shop, Aldi, Lidl, or Trader Joe’s? In a recent real estate return forecasting model, we investigated the prevalence of Trader Joe’s, and its ability to forecast returns. Unknown to most, Trader Joe’s is actually owned by Aldi, a German-based discount retailer better known for bare-bones retail space, putting fire to the feet of overpriced grocery stores in Europe. In 1960, the Aldi brothers divided their imperium into Aldi Nord and Aldi Süd. The Süd part of the business includes Aldi in the US, but Aldi Nord acquired Trader Joe’s in 1967. At that time, Trader Joe’s was pretty much a hippy store in California, known for having a good wine selection. But today, Trader Joe’s operates almost 500 stores across the US, often in areas similar to Whole Foods territory. Indeed, the two grocery stores seem to follow a location strategy that is quite similar — check out the distribution of Trader Joe’s stores across the US, relative to Whole Foods (click on the maps for a more detailed view):
The map of Trader Joe’s and Whole Foods also provides an overlay of the unemployment rate, as a proxy for the local demographic profile (this map shows an overlay of education levels). Further comparisons of 2016 Census data in the graphs below show that the areas where Whole Foods and Trader Joe’s are located (measured by Census tract) are pretty much the same! Also note how dissimilar the profile is from the US average, with Trader Joe’s and Whole Foods located in areas that have, for example, median income that is higher than the national average by about 50 percent.
Now, that raises an interesting perspective. What if another big online retail platform would want to get foot on US soil, gaining exposure to the most desired demographic group that the US has to offer? An easy way in would be to acquire Trader Joe’s! Of course, that is easier said than done — Trader Joe’s is wholly owned by Aldi Nord, which is owned by three different trusts. That said, we can think of quite a few online retailers that would (want to) eat Trader Joe’s for breakfast (and ideally, Aldi for lunch). Perhaps Alibaba, with some 62 billion in revenue and a market cap of almost 500 billion? The war chest of 200 billion should be sufficient to provide for even the frothiest of German valuations. Perhaps the acquisition of Trader Joe’s by Alibaba will be the sticker shocker for retail in 2018?