Cramer: I've Lived Through What Amazon Does to Retail; Back Then, It Was Walmart

 | Jun 19, 2017 | 7:57 AM EDT
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Why are both the food and grocery industries so frightened of the Amazon (AMZN) deal? I know that many investors were shocked at the visceral dumping of pretty much every retailer that could compete with the combination. I also thought that the opening prices with their severe collapse were overdone, but we've come to expect that a combination of market sellers and ETF bashers will produce such a reaction.

Clearly, also, the fact that the stock of Whole Foods (WFM) traded through the $42 bid price shows that we haven't seen the last of the bidding.

You have to believe that Walmart (WMT) must come in and try to wrest this asset from Amazon just to preserve its big lead in food -- the one area that doesn't lend itself to Amazon in its current format.

Given that the stock of Whole Foods traded in the $60s four years ago and in the $50s just two years ago, it does seem that Amazon's getting almost a sweatheart price, one that Walmart can easily best -- although that doesn't mean Amazon can't come right back with a higher offer. Walmart does have to care more about its earnings estimates than Amazon, so there will be a breaking point, but it does say that owning Whole Foods here isn't a bad bet.

One has to wonder whether Whole Foods CEO John Mackey just got fed up with the job. The last few conference calls he was defensive, talking about how investors chronically underrated how lucrative the stores were. Then when Jana came in and started bossing him around, it really got pretty ugly, especially after Mackey dramatically upgraded his board, elevating Gaby Sulzberger, a top-notch investment manager, to chairman and adding the fabulous Ron Shaich, CEO of Panera Bread PNRA, who has created the finest loyalty plan and had employed the best technology to get customers in and out without a mosh pit waiting area.

No wonder Mackey called Janney "greedy bastards" in a recent interview and said that the investment company was trying to destroy his reputation. No matter what Mackey did, it wasn't enough for Jana. So he probably wanted to move on. He's a prickly soul and he doesn't need this aggravation.

But let's go back to the explosive reaction to so many different stocks of so many different kinds of retailers that also sell food and ask: is it an overreaction?

The initial exaggerated prices might be too much and the closing prices seemed a tad low, too, but maybe not for long.

Now, let me be personal for two seconds. I have, from my nature as a host and reporter about business for so many years, talked to a lot of executives. Everyone is conscious about the power of Amazon. Everyone. Most misjudged what it could do to books and entertainment. Then they misjudged what it could do to traditional retail. So, Friday's reaction was based on thousands of conversations like those I have had, which expressed concern about what would happen to gross margins if Amazon were to go into any industry where consumers spend money.

Why?

For that I want to talk about Pop, specifically my dad's business of selling boxes and bags to small retailers in the Philadelphia area. My father had a pretty thriving business in nameplate bags, the ones that have the stores' name on them. Lots of his customers sold clothes and had years and years and years of successful sales.

But then one day Walmart moved into the area. I had been recommending the stock of Walmart at Goldman Sachs based its fabulous growth and low prices, even as I had only been to a couple, because they had not yet moved to the Northeast.

Soon my father's customers began to drop like flies. I heard Pop say to his brother, his partner at the time, that these fabulous long-term clients were all moaning that Walmart was selling shirts for the same price that his customers were buying them from the manufacturer. There was simply no way they could mark them up and have any margin.

Most of his customers were gone in two years' time. Two years!!! He had to pivot and start making doggie bags for restaurants because of how quickly Walmart destroyed the mom and pop businesses that had been fixtures in the Philadelphia area.

Not that long ago, Walmart decided that it could integrate food into the mix. Many analysts were skeptical that you could sell food next to hard goods and clothes, but within a few years Walmart had succeeded in doing so and now it is the number one food retailer in the country.

How did Walmart do this? Simple: it was the lowest cost operator and it had a non-union low-paid work force.

Now comes Amazon, which is a still lower cost producer than Walmart so it stands to reason that Amazon can do to Walmart exactly what Walmart to all the others it destroyed.

Not only that, but Amazon isn't just any low-cost producer. It has tremendous artificial intelligence to know what you want -- something the grocers have been woeful at. It has Amazon Prime, which can easily offer deals that would be unthinkable from, say, Kroger's (KSS) point of view. It could offer a daily free egg special or $1.0 milk to those who belong to prime.

Obviously, it can offer all sorts of delivery systems by precise times, and given that Uber already does $3 billion in delivery business it could enlist the taxi company as an integral part of its offerings.

You could use the echo to order so easily as you look around your kitchen. You can install the Amazon button for certain staples and even more offerings.

Plus, in terms of keeping costs down, Amazon has the best check-out technology where I presume you can use your Apple iPhone to wand goods and get out without checkers, something that saves a huge amount in labor costs and gets rid of one of our principal complaints about Whole Foods, that it has long checkout lines.

A lot of people seem to be caught up in how expensive Whole Foods is right now, so who would want to go there? That's presuming that Amazon won't change pricing for the better. Nobody I know thinks that Whole Foods offers bad food; just the opposite. Now it will all be more reasonable.

Some were struck by how hard hit the drug store chains were. But we have to presume that Amazon will out prescription drug pick-ups in their stores. Others were struck by how hard hit the packaged goods companies were. I thought it made sense, given that Walmart extracts big concessions from all of those companies and now Amazon will be doing the same. I would not be surprised to see big mergers among these companies to get more heft to be able to deal with these rapacious customers.

So not only do I think the reactions will prove to be right, I recognize that there will be some remarkable transformations ahead. I am sure, for example, in the short term, traders will want to buy Kroger betting you won't feel the impact of Amazon for a couple of years. I think that's short-sighted. I could argue that the two new German entrants, Aldi and Lidl, would be enough to send Kroger down further than it descended after Thursday's weak forecast. I am sure that they will take the drug store stocks back and some of the packaged goods companies, because Amazon hasn't articulated a pharmacy strategy yet and the packaged goods companies may see the merger writing on the wall.

Nevertheless, anyone who thinks that Amazon won't do to Walmart what Walmart did to my father's customers, just haven't lived it. You have to live it to know it. Otherwise, it's too theoretical for your taste.

Believe me, there's nothing theoretical. It's a reality for everyone from Costco (COST) to CVS (CVS) to Walmart and Target (TGT) . And it's an unpalatable, but inexorable reality that they never saw coming or, if they were prescient, hoped would never come.

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