Jefferies

Actionable Ideas for Companies and Sponsors

Amazon’s Purchase of Whole Foods Will Increase Distressed Activity in the Retail Sector

Even prior to the announcement of Amazon’s acquisition of Whole Foods, all signs were already pointing to a massive restructuring of the retail sector. These trends include: 1) AlixPartners’ 2017 Restructuring Survey, which overwhelmingly (67%) identified the U.S. retail sector as the most likely industry to face financial distress over the course of this year, surpassing the oil & gas sector and health care industry; 2) 27% of all high yield retailer bonds trading at distressed levels, suggesting that the market is pricing in some form of reorganization or bankruptcy; 3) Fitch predicting that the default rate for the retail sector will exceed 9% over the next twelve months; 4) the ongoing migration of spending to the internet, and shoppers seeking value as they turn away from pricey brands; and 5) retail’s cost base being structurally difficult to lower because of the industry’s large real estate footprint, with the U.S. having the largest retail footprint.

The acquisition by Amazon significantly exacerbates these distress trends in the retailing sector, because if Amazon can enmesh itself in the frequent purchases of groceries, Amazon’s experience shows that customers will turn to Amazon to purchase other types of goods as well.