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THE UNSTOPPABLE AMAZON

EXECUTIVE SUMMARY

We have detected three structural disruption developments in the Amazon river this year:

ï‚· Rising water levels: The water levels along the customer channel have been rising over the banks, starting to submerge the department stores and apparel retailers, which have seen their stocks decline by an average of 25%. The waters have even started to flood the specialty stores and apparel, accessories and luxury goods companies, as their stocks have declined by an average of 10%. In turn, this has started to cause damage to the retail REITs, which are also down an average of 10% as they provide the bricks-and-mortar foundation to these retailers.
ï‚· Looking to access new channels: We have seen signs that the waters of the Amazon river were looking to start flowing down the structural and supplier channels.
ï‚· Increasing erosion: The Amazon river has started to pick up speed and widen, leading to erosion. This is evidenced by the fact the 282 companies lying along the retail shoreline had declined by an average of 4.5% this year, which compared to the 8.7% gain in the S&P 500 represents a negative delta of 1,320 basis points.

On Friday, June 16, the dam that had been protecting the retail shores of the structural and supplier channels was blown open with Amazon's acquisition of Whole Foods. In addition to providing Amazon the opportunity to develop a deeper relationship with Whole Foods' 30-million customers, deepening the waters in the customer channel, Whole Foods provides Amazon with a footprint of 464 stores along the structural channel as well as a private label brand and fresh food business along the supplier channel. This event led to an average 0.8% decline in the stocks in the following two trading days, with the hypermarkets & super centres, food retailers, food distributors and retail REITs all declining more than 3%.

As evidenced by Amazon's launch of Prime Wardrobe and the Dash Wand only a few days later, the three channels of the Amazon river will only keep rising and flowing faster as it leverages Whole Foods' structural, supplier and customer capital with its base of 80 million U.S. Prime members, its dominant e-commerce platform and its ongoing investments in artificial intelligence. We expect the acquisition of Whole Food will accelerate Amazon's announced entry into the following new spaces:

ï‚· Online meal kit and meal delivery service: Leverage Whole Foods' supplier base of prepared foods and fresh food.
ï‚· Drug retail: Add pharmacies to Whole Body section in stores.
ï‚· Consumer packaged goods: Re-design and re-package Whole Foods' private label brand of 5,300 SKUs to offer to Prime members through grocery subscription models.
ï‚· Furniture & appliances: Add augmented reality showrooms to stores.
ï‚· Alexa-enabled devices: Market its Alexa-enabled devices in the stores.

Amazon's acquisition of Whole Foods will create a huge vector of change for the following 19 sub-industries that lie along the shores of the three retail channels:

 Structural Channel — Strong Magnitude: Food retail, hypermarkets & super centres, general merchandise, drug retail, retail REITs; Moderate Magnitude: Warehouse REITs, homefurnishing retail, household appliances, home improvement retail.
 Supplier Channel — Strong Magnitude: Food distributors, packaged foods & meats, agricultural products, household products; Moderate Magnitude: Restaurants, soft drinks.
 Customer Channel — Moderate Magnitude: Department stores, apparel retail, apparel, accessories & luxury goods, specialty stores.