Why It Does (and Doesn’t) Make Sense for Amazon to Buy Target
Brick and mortar aspirations for Jeff Bezos and his e-commerce giant are reportedly growing at an exponential rate — or they’re not, depending on which news websites you frequent. But the headline is one that will make any individual, whether they cover the retail industry or not, stop and think for a second: Amazon is, at the very least, interested in the idea of purchasing Target.
That idea was first uttered by influential tech analyst Gene Munster, who made the prediction in a blog post.
“Amazon believe’s [sic] the future of retail is a mix of mostly online and some offline,” Munster wrote. “Target is the ideal offline partner for Amazon for two reasons, shared demographic and manageable but comprehensive store count. As for the demographic, Target’s focus on moms is central to Amazon’s approach to win wallet share. … As for retail stores, Amazon’s acquisition of Whole Foods 470 stores along with testing of the Amazon Go retail concept is evidence that Amazon sees the future of retail as a combination of mostly online and some offline.”
My initial gut reaction to the idea of Amazon buying Target says a lot about how times have changed in the retail industry. Rather than being totally shocked and in awe by the possible mega merger of two retail giants, I’m more apt to shrug and utter something along the lines of, “Huh, I guess that makes sense.” The only reason I think I feel that way is because we’ve been here before, as Munster pointed out. It hasn’t even been six months since Amazon opened its wallet and pulled out a cool $13.7 billion to buy Whole Foods.
That move made clear their intention of getting into the physical retail game, so the natural progression, then, would be to up the stakes and make a larger investment, right?
Why It Doesn’t Make Sense
In a sort of response blog post, Forbes contributor Richard Kestenbaum offered a number of reason why the Target acquisition simply wouldn’t make sense for Amazon.
“One of the ways that Amazon is unique that isn't much talked about is its cost of capital, which is very low, nearly zero,” he wrote. “If your personal cost of capital were zero, you would act differently. … You would make investments in certain assets that you otherwise couldn't afford. You'd buy securities and hold them for appreciation. Companies would act the same way. “
Kestenbaum goes on to explain that Amazon’s low cost of capital has allowed the company to experiment different ways it can grow, making acquisitions, trying new technologies, and allowing for failure, all at a cost that is little to nothing. A move like buying Target would result in investors potentially viewing Amazon — potentially — as a traditional retailer, thus raising its cost of capital. They all of a sudden become a riskier bet, which could have a big impact on a highly valuable number: Amazon’s stock price.
“Its entire management team could leave in a short time if the stock started to move in a different direction for a length of time. Their compensation would be cut in a way they wouldn't tolerate for long,” Kestenbaum wrote. “The risk that Amazon could be viewed differently by the marketplace because a very substantial part of its earnings would be coming from a lower-growth business could very well impair or destroy the company. If enough people leave, the business can unravel and that's not a risk worth taking.”
The reason that the Whole Foods acquisition didn’t have as big of an impact on the company’s capital has more to do with the fact that it allowed Amazon to move into a market — the grocery business — that it wasn’t already totally dominating. They can realize a massive amount of growth there, which is key to the company keeping its cost of capital low. A move to acquire a company like Target is more of a physical footprint play rather than Amazon trying to find an actual new market or industry to move into.
Why It Does Make Sense
All of that said, the storyline that came out of 2017 in retail was the escalating battle between Amazon and Walmart. The two made several steps, practically in unison with one another, as they looked to combat offerings and dominate the retail landscape.
The one area where Walmart continues to have a leg up on Amazon is its ability to meet the customer in a physical space and offer them in-person service. Walmart boasts roughly 11,700 stores globally. With its Whole Foods move, Amazon added 470 stores to its portfolio to go along with a handful of bookstores and its Amazon Go location that is still in the testing phase. If it were to add Target to the mix, that’s an additional 2,300 locations — still far fewer than Walmart, but enough to make Amazon a much bigger player in the brick and mortar space.
And in terms of the value of the deal, Target, according to a number of different analysts, is an undervalued asset right now, which means that Amazon could see return on its investment at a greater rate than what Kestenbaum would have you believe. Right now, Target is valued at around $42 billion, which is less than a tenth of what Amazon checks in at. Target would become a sizeable chunk of Amazon’s overall value. The hope would be that, upon investment, the value of Target as an Amazon company experiences growth almost immediately, making it a win for Amazon on Day 1.
There’s also the value to the consumer of a potential Target-Amazon marriage. Target has already made moves to improve its own internal logistics network, acquiring a service last month that would bolster same-day delivery capabilities. Imagine the powerhouse that would be created with the combined logistics networks of Amazon and Target, both from a warehousing standpoint and an actual delivery standpoint. Target brand paper towels and toilet paper delivered in an hour? Yes please.
And lastly, the potential acquisition really shouldn’t face much legal scrutiny — despite President Trump’s disdain for Bezos. The combined Amazon-Target company would account for roughly 13 percent of the total retail share of the top 18 U.S. retailers, which ranks behind Walmart’s 23 percent.
It almost makes too much sense for Amazon to buy Target and quickly expand its retail footprint to better compete in that realm against Walmart. But, despite their penchant for diving head first into acquisitions and big deals like this, the risk—as outlined by Kestenbaum — makes me believe Amazon would want to really do their due diligence before making a move to buy Target.
They haven’t even fully implemented their brick and mortar strategy with Whole Foods yet, which leads me to believe Amazon isn’t going to go ahead and buy Target on a whim and start working on an entirely new brick and mortar strategy for that company.
But, then again, this is Amazon we’re talking about, and who knows that the heck they’re thinking?