Amazon has an underappreciated weapon in groceries: M&A advisor

Grocery stores that millennials and Generation X grew up patronizing — from Kroger to Publix — are now being challenged and in some cases overwhelmed by non-traditional grocers. Total grocery sales from the likes of WalmartDollar GeneralCVS and Amazon have overtaken those from mom-and-pops as well as national pure-play grocery chains.

Amazon (AMZN), in particular, has an underappreciated edge against those older competitors, according to one M&A advisor — the cost of capital.

“The bigger companies are, the better their cost of capital. The better their cost of capital, the cheaper they borrow, the lower their traffic acquisition cost,” Scott Moses told Yahoo Finance’s On the Move. Moses is the head of the grocery and restaurants investment banking practice at PJ Solomon.

The competitive grocery landscape

Moses has mapped out the landscape for grocers, and found that traditional chains have waned both because of price competition and the spike in stores like Dollar General and Walgreens adding more food items. But he said that all comes back to larger companies’ lower cost of doing business.

“Keep in mind, Amazon is a AA- credit. That means they borrow cheaper than most countries,” Moses said.

Amazon is due to report earnings after the close of trading Thursday. The retail giant doesn’t break out revenue from groceries and food items sold on its site. Revenue from physical stores, which includes Whole Foods Markets and Amazon-branded locations, totaled $17 billion last year, 7.4% of Amazon’s total sales.

Whatever the specific numbers, Moses said Amazon’s size and scale has made the industry very difficult for smaller competitors.

“What matters in grocery is whether you’ve got the capacity to make investments in people, in price, in technology and in growth” he said.

That has implications not just for Amazon’s growth and that of its competitors, but for communities where traditional grocers are located.

“Grocery stores have been pillars of thousands of American communities for generations,” Moses wrote in a recent report. “We hope clients don’t wait two years too late before calling us, as too many have.”

Analysts are predicting Amazon will report second-quarter sales of $62.46 billion, an 18% increase.

Julie Hyman is the co-anchor of On the Move on Yahoo Finance.

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