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Is This Whole Foods Supplier the Real Winner in the Amazon Buy?

Motley Fool Staff, The Motley Fool

In this segment of the MarketFoolery podcast, host Chris Hill and Million Dollar Portfolio's Jason Moser discuss an apparent beneficiary of Amazon's (NASDAQ: AMZN) Whole Foods acquisition. United Natural Foods (NASDAQ: UNFI) is a supplier to many grocery chains, but Whole Foods is particularly reliant on it. Its share price had fallen by more than 60% since early 2015, but it's lately been rebounding thanks to increasing sales through the upscale chain.

A full transcript follows the video.

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This video was recorded on Dec. 11, 2017.

Chris Hill: United Natural Foods is a major supplier for Whole Foods, and United Natural's stock has had a rough couple of years. Early 2015, it was just over $80 per share. Earlier this year, it had fallen as low as $29. The last few months, it's really started to bounce back. You pointed me to a story that seems to indicate that United Natural Foods might be the hidden beneficiary of Amazon's acquisition of Whole Foods.

Jason Moser: It could be. This is actually a really interesting story that's developing. I think it proves that the Amazon Whole Foods tie-up is more important -- obviously very important in a lot of different ways, but it's beyond just those two big names, Amazon and Whole Foods. United Natural Foods is a company I've covered for some time now, one I started researching back in 2012. On the surface, you look at the business, it's in food distribution, which is really a very low margin game. The only way this makes an attractive investment is either you get a mispricing, or you recognize that you've really got the biggest player in the space and they own that competitive advantage that'll allow them to keep growing and commanding at least some pricing. United Natural Foods has a very strong network across the country. It's the biggest distribution network in the country. They've done a very good job over time of being able to get those naturals and organics and all those sorts of new products that are really starting to stock on those shelves. Whole Foods is responsible for a lot of their money. If you look back to any given year, about a third of Whole Foods' total sales is thanks to United Natural Foods.

Now, United Natural Foods if a supplier to not just Whole Foods. They supply Safeway, Kroger, Publix, Wegmans. They supply all of these grocers. But when we saw this acquisition, when we saw Amazon buy Whole Foods, there was a big question mark as to how exactly this was going to work out for United Natural Foods. On the one hand, you could see, maybe this results in a lot of potential business for them if Amazon is really good about growing that footprint and getting more people to shop at Whole Foods. On the other side, given Amazon's expertise in fulfillment, logistics, and whatnot, it's very reasonable to assume they could disrupt United Natural Foods and do something better at a lower cost. It does appear, at least in the early innings here, that United Natural Foods may benefit from this relationship, because they were surprised a little bit to the upside. They got a lot of extra business here, presumably from Whole Foods. You read between the lines, you can see that it was from Whole Foods. And when we look at online grocery sales, that was $42 billion in 2016, that was up 156% from 2015. Now, with Amazon buying Whole Foods, with all of the new ways that this model is shaking out, this is a number that's only going to continue to grow. So, it would seem, at least, that United Natural Foods should benefit from this. I think the earliest assumptions are that they will. Time will obviously tell, certainly it was a good quarter for the company. It seems like the stock is starting to reflect a little more optimism.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Jason Moser has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.