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Amazon and Walmart are investing capital to be both leading retailers and leading grocers: M&A Advisor

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Scott Moses, PJ Solomon Managing Director joins the Yahoo Finance Live panel to discuss the recent grocery tailwinds and headwinds.

Video Transcript

AKIKO FUJITA: Well, the market share for online grocers has roughly doubled over the last year. But that only still amounts to about 10% of the overall market. And our next guest says he sees much more upside ahead, even as more and more Americans return to work, return to normal, and potentially move a little outside of their homes.

Let's bring in Scott Moses, PJ Solomon managing director. Scott, that number, to me, is surprising in the context of the conversations we have had over the last year. We've seen this massive acceleration in online grocery shopping. How much of that type of growth that we saw over the last year do you think a sustainable?

SCOTT MOSES: Well, I think, first of all, good morning. It's great to be here. And I'd say that a good deal of it is going to be sustainable because if you look at countries outside the United States, like China, Japan, Korea, online grocery is roughly 25%. So the notion that it's going to continue to grow and become an important part of people's lives, I think, is really accurate.

And just broadly as it relates to grocery demand, we think that that is going to continue to be strong relative to the pre-COVID period also. Remember during periods of elevated unemployment, people tend to try to save money on groceries. Over the last year, millions of people have become amateur chefs, myself included. Nearly 100,000 restaurants have closed over the last year. And even though things are opening up, some people are going to be reluctant to go back. And a bunch of folks are going to continue to work remotely. And so some percentage of the meals that they would historically have eaten near work, now they're going to eat near home when they continue to work remotely, even as things open up.

ZACK GUZMAN: Yeah. When we looked at growth moving forward, projected to double again by 2025 there, at least when it comes to online grocery. And the leaders aren't maybe who you would expect if you were new to tracking this space. You think about Amazon, Walmart, Target, Costco, not the traditional grocery names that come to mind if you're thinking about shopping in your neighborhood. So I mean, who is winning when it comes to that? And why is it maybe those names over traditional grocery stores? And what have they done right to win these grocery sales?

SCOTT MOSES: Well, big picture, nontraditional grocers like Walmart, Target, Costco, and Amazon, as you mentioned, are the leading grocers in the United States. They have more grocery sales than traditional supermarkets by a pretty wide margin and growing quickly. Six in 10 people in the United States call those nontraditional grocers their primary shop. That was less than 20% 20 years ago.

And one of the reasons that's the case is these larger operators can use their very low cost of capital to invest in customer acquisition and retention and in particular, in online grocery. So they have been the clear winners. And while everyone in grocery has done better over the last few years, the last few months, there's no doubt that Walmart and Amazon have pulled ahead, I think, a little farther than a lot of folks expect.

Now, with that said, I would note that just earlier this week, we announced the sale of a great online consumables bulk grocer, Boxed.com, which is doing really extraordinary things and I think is going to be taking back a fair amount of that share over the next few years.

AKIKO FUJITA: It does feel like increasingly, the hybrid approach is winning. Buy online, you pick up in-store. Amazon, obviously, with that acquisition of Whole Foods. You've got Walmart, who's really sort of built out and used their brick-and-mortar footprint to their advantage. Is that likely to spur more deals in the space? Or do you think there's a real clear divide where names who are strictly online can still win in a big way, even without the kind of exposure or brick-and-mortar exposure that we've seen some of these other big names have?

SCOTT MOSES: Well, I think it's both. So there's no doubt that Amazon, who's now the sixth largest grocer in the United States, has gotten the same epiphany that Walmart got 25 years ago, which is, if you're going to be the leading retailer in the world, you've got to be the leading grocer in the world. And they are investing a great deal of capital to get there.

They are a AA minus credit, which means they borrow cheaper than most countries. Their market cap is more than literally every grocer combined by a wide margin, that's Walmart, Target, Costco, BJ's, Dollar General, Family Dollar, CVS, and Walgreens. All of them combined are worth well less than Amazon today.

And as Amazon uses its low cost of capital to make investments to strengthen its Prime ecosystem, like the MGM deal-- MGM's an 8 and 1/2 billion dollar acquisition. Relative to its $1.7 trillion market cap, that's 51 basis points. It's 0.51%. And now families all over the country can show "Rocky" to their kids whatever they want, which is great.

Most folks can't keep up with that. And as a consequence, it's going to require more transaction activities so that regional businesses can become part of larger ecosystems that will help them retain customers.

Now, the other side of that coin are guys like Boxed. People are increasingly focused on who they're buying their stuff from. And Boxed is a business that's got a great story. It's a great example of the American dream. Boxed was founded by Chieh Huang and his co-founders eight years ago in Chieh's garage in New Jersey. It's now an end-to-end platform using AI and robotics to serve these really extraordinary automated fulfillment centers. And they're serving consumers, businesses like airlines.

And now they're using their technology with their SaaS business with the largest brick-and-mortar retailer in Asia. And so when you're doing things differently, as Boxed is as an ESG business, where they are majority minority, they're attacking the pink tax which prices female products like razors and shampoo more than men's products. And they're trying to reduce their carbon footprint by selling big boxes full of stuff using their technology to do that.

Think about how many orders you've done where you've gotten 10 or 12 items. They come in four packages. Most of them are half-empty. And it's basically a big box, some sealed air, and your Chapstick. That's not a way to help the planet. But Boxed is actually doing that. And I think it's going to make a real difference.

ZACK GUZMAN: Yeah. And we had Chieh on on Monday to kind of talk about the sale here, to celebrate the next chapter in the business as well. But real quick, before we let you go, Scott, I mean, you're kind of describing those big boys taking over grocery here.

And it sounds like the traditional grocers are already playing catch-up as is. I mean, what do you see in terms of consolidation in the space, whether or not one of those big boys wants to take over a major grocer, like an Amazon and Whole Foods, as we already saw? But then on top of that, maybe consolidation just to catch up.

SCOTT MOSES: Well, look, consolidation, scale matters in grocery. Like I said, cost of capital is important to acquire and retain customers. And the bigger you are statistically, the better your credit rating, the better your cost of capital.

So we happen to think that transactions are going to continue because the cost savings that these combinations can generate, from procurement to logistics to store management and corporate contracts, they are significant. And in many cases, they're actually bigger than the EBITDA of the companies involved.

So I think it's really important that, when folks are evaluating these transactions, they remember just how important they are coming back to the beginning to protect the grocers that have been doing such a great job protecting us during this crisis and really serving heroically.

We need our local grocers. We need to protect them with these kinds of transactions that help them compete with the biggest guys who continue to grow and gain scale.

AKIKO FUJITA: Yeah. The need for some balance in the space, certainly. Scott Moses, PJ Solomon managing director. It's good to talk to you today.