Amazon's Whole Foods Bid Could Spell Trouble for Payment Companies

S&P Global Market Intelligence
Written By: Rachel Stone
S&P Global Market Intelligence
Written By: Rachel Stone

Terminal providers and merchant acquirers, two subsets of the payments industry that rely on foot traffic and transaction volume, might see changes ahead as a result of Amazon.com Inc.'s bid for Whole Foods Market Inc.

Amazon shocked analysts June 16 when it announced an all-cash transaction to buy Whole Foods for $13.7 billion. But the companies did not hold a conference call to discuss the deal, and public statements offered little in the way of a blueprint for what comes next. Analysts and others quickly scrambled to try to make sense of the deal and its implications.

Credit Suisse analyst Paul Condra speculated in a June 16 note that Vantiv Inc. and VeriFone Systems Inc. would be most directly affected if the deal portends the end of the status quo in grocery retail. Condra acknowledged that the risks of retail changing dramatically are poorly understood but said he expects investors to focus on these exposures.

"Even if we don't know how to size the impacts or what specifically [they] will be, I think the market is going to price in a little bit more risk," he said in an interview.

New pressures or weakening in the grocery industry where Vantiv, a payment processor, has a lot of business would negatively impact the company, Condra said.

Right now, Whole Foods uses Vantiv for payment processing. But Amazon uses JPMorgan Chase & Co.'s payment processing and merchant acquiring business. Condra thinks the online retailer's first move could be to shift Whole Foods' payment processing from Vantiv to Chase. But even if this happens, he said Vantiv would lose less than 1% of its net revenue.

"They're not going to lose business, but maybe growth slows," he said. "Maybe there's a bit of a hit to the stock multiple because people see this as a threat to the business."

Guggenheim Securities analyst Jeffrey Cantwell believes the near-term impact would be largely limited to basis points of revenue over the next few years. Cantwell expects some shift in how consumers spend money, but even over the long term, it will not drastically affect Vantiv.

"By the time this has a sizable enough impact further down the road, it's going to be a different company," he said in an interview. "You have the longer term, more structural impact, which I'm arguing will be partly offset by growth in their other channels."

Merchant acquirers like Vantiv will still have payment volume routed through them, even with the shift to e-commerce, Barclays analyst Darrin Peller noted in an interview. But Verifone and other terminal manufacturers might be at a greater risk.

If the world shifts more to e-commerce, then demand for the in-store terminals that VeriFone provides shrinks, Peller said, though this shift is not yet as widespread in grocery retail as it is in other retail sectors.

"The bread and butter for them really is big-box retail lanes in the U.S.," Credit Suisse's Condra said. "Grocery stores have always been seen as this safe haven. This introduces a new threat to that retail channel that wasn't really there before."

Still, not all analysts think this deal spells the end of the status quo for grocery stores.

"[Amazon] has been in the food business for over 10 years and to now come to the conclusion that it needs physical brick and mortar stores is a pretty big deal," wrote Jefferies analyst Daniel Binder in a June 16 research note. "It suggests stores are in fact important and not just some defensive point of view that traditional brick and mortar players have taken."

Peller offered another scenario for brick-and-mortar stores, in which consumers might pick up items in person after paying for them online. The payment process might still exist, but it will look different, and the physical terminals where cards are swiped soon may not be needed.

"The real winners are going to be the companies that can capture the mobile mindshare of the consumer [and] have a good capability built around e-commerce processing," he said.