Failed Experiments

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Dear fellow investors,

We were watching CNBC recently and an analyst mentioned what practically nobody besides us has said. She called Amazon’s (AMZN) entry into the grocery business a “failed experiment.” Amazon has been very successful with its Prime subscription model in other areas. Why do experiments usually fail, even among companies which have made other experiments succeed? As the stock market grieves the mass destruction of capital in the early stages of the tech/growth bear market, let’s delve into this very important subject.

Why did AMZN buy Whole Foods?

When the capital markets price you on sales growth and Totally Addressable Markets (TAM), you must show them where your next big sales growth will come from. The grocery business was a $385 billion sales category in 2017. AMZN wanted investors to incorporate into their thinking that AMZN would take a big part of those sales, like they did in other major retail sales categories.

What was the immediate response?

The stock market crushed everyone in the grocery business from Costco (COST) to Target (TGT) to Walmart (WMT) to Kroger (KR). They bid up AMZN and anticipated the next wave of “fly wheel” benefits to the company.

What is the reality four-plus years later?

The grocery business has been one the best businesses in the pandemic and AMZN is a big player in the industry, but the revenues from grocery are not relevant to the company. Here is where they stood in 2021 and where they are projected to be by Supermarket News:

Amazon’s online edible grocery sales are projected to climb to $26.7 billion worldwide in 2026 from $14.5 billion in 2021, a compound annual growth rate (CAGR) of 13%, according to the latest Food and Beverage Sector Report from Edge Retail Insight.

Amazon had around $470 billion in revenue in 2021. Was it worth it to pick up $14.5 billion in revenue in online grocery sales?

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