Amazon.com Inc. (AMZN) may have sent the shock heard around the retail world, when it announced on Friday, June 16, it was buying Whole Foods Markets Inc. (WFM) for $13.7 billion. The reaction amongst the grocers was sharp, with shares of all the major grocery chains taking a major hit. It was a play out of left field for Jeff Bezos and Amazon, but what just happened is much bigger than just the grocers.

market cap lost of kroger, costco, and wal-mart

Shares of The Kroger Co. (KR), Costco Wholesale Corporation (COST) and Wal-Mart Stores Inc. (WMT) lost nearly $19 billion in market-cap between them. The effects of news rippled throughout the land. (For more, see: Top 10 Companies Owned by Amazon.)

Price chart for amazon, wal-mart, kroger, costco, hain and unfi

KR Price data by YCharts

Chain Reaction

In total, shares of Kroger fell by nearly 9% on June 16th, Costco dropped by 7% and Wal-mart by 5%. Shares of food suppliers The Hain Celestial Group (HAIN) decreased by almost 4%, and United Natural Food Inc. (UNFI) fell by nearly 12%. The acquisition affects the whole chain, from grocers to suppliers to producers. Amazon will have the power now to pressure providers of Whole Foods with cutting cost. With margins already thin, for many of these suppliers there may not be much for them to cut. Grocers will likely be forced to get into a war with Amazon over pricing, potential putting deflation on the cost of food.

amazon revenue and net income chart

AMZN Revenue (TTM) data by YCharts

Amazon has had no problem in the past losing money with a long-term view on driving revenue growth higher. It is likely we will see Amazon apply the same pressures to the suppliers of Whole Foods, just like it has done with the rest of the retail space.

KR Operating Margin (TTM) Chart

KR Operating Margin (TTM) data by YCharts

However, the operating margins for the grocers and suppliers as the chart above shows, are razor thin. A 2% sales price decrease, could mean life or death for some of these companies.

Total Domination

What Amazon's purchase did was so much more than about the food delivery business. Amazon just bought about 450 locations across the U.S., where customers could one day potentially go to do more than just buy groceries. Amazon could now create pick-up centers or return centers at Whole Foods locations. The spill-over effect goes right to the heart of one the last advantages the retail sector had left. While a customer is going food shopping, they can now return those shoes that they bought on Prime, that doesn't feel just right.

Stocks of the major retailers have already taken a major hit in 2017, with shares of Macy's Inc. (M) down almost 36% for 2017 already.

JCP Chart

JCP data by YCharts

Surprisingly, the rest of the retail names didn't take a hit on Friday, but perhaps it is because the news was so shocking investors have yet to have the time to think through what this acquisition means for the rest of the group. (For more, see: How We'll All Be Amazon.com Customers Eventually.)

For Amazon, it means getting one step closer to total domination in retail, but potentially being completely integrated into a person's daily life. For all of retail, it is just one more nail in the coffin.

Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

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