Amazon’s risky bet

Nassin Nicholas Taleb made famous the idea of the black swan, or statistically hard-to-predict events.

In short, extremely low-probability occurrences may take place, and they happen more than statistics would indicate.

These days, one could make the argument these black swan events are essentially the norm.  

Whole Foods

Whole Foods

Donald Trump, a real estate developer and casino magnate, is the President of the United States.  

In the financial markets, Internet companies trade at sky- high valuations, once not thought possible.  

Last week, (AMZN) disrupted the competitive world of supermarket retailing by buying Whole Foods (WFM) for nearly $14 billion dollars.


From a strategic perspective, the deal makes sense because Amazon buys its way into a competitive position in food retailing.

Over time, it can leverage its Amazon Prime program to give Whole Foods access to all those customers who might be accustomed to buying groceries elsewhere.  

Investors went wild over the deal and boosted Amazon’s stock price, while selling off shares in Kroger (KR), Wal-Mart (WMT), Target (TGT), and Costco (COST).  


Far be it for me to come off as bucking conventional wisdom, but this deal may come with risks for Amazon. First, from a capital efficiency standpoint, you have to kind of shake your head in my opinion.

Amazon is doing an all-cash deal and the deal represents more than half the company’s cash stockpile of $24 billion.

Soaring Stock

Regarding the price, in my opinion he paid a fair multiple for a premium brand, which is a distant fourth in market share for groceries.  

Strategically, with far more competition in the cloud space coming from Microsoft (MSFT) and Google (GOOGL), the Wholesale Food deal may be a distraction.

Time Drain

It will require more attention from senior management, potentially making Amazon Web Services more vulnerable on that business front.  

Also, if Wal-Mart, Target and Costco weren’t focused on Amazon before, they are now.

In my opinion, this was an extreme event, and very consistent with the current environment.

Photo Credit: tomatoes and friends via Flickr Creative Commons