Although COVID-19 has slowed consumer spending, the pandemic may result in retailers and brands searching for good deals, such as JC Penney. Penney’s has announced that it plans to close roughly 240 of its 846 stores permanently over the next two years as part of its turnaround starting with its recent bankruptcy filing.
The trade publication Women’s Wear Daily reported that Amazon is in negotiations with the struggling mid-priced department store chain about a deal. The rationale for Amazon is its desire to broaden its apparel business and to turn some of JC Penney’s physical properties into distribution centers, the publication reported. Several other media outlets have also reported that JC Penney is a possible acquisition target for Jeff Bezos and Amazon.
While Amazon has not commented on the report, its investors seemed to approve of the idea, bidding the stock higher in a lower market this week.
Amazon’s most notable brick-and-mortar purchase to date is its $13.7 billion purchase of Whole Foods in 2017. The grocery chain has been a significant component in Amazon’s grocery fulfillment centers in satisfying the increased demand from stay-at-home shoppers. Amazon Fresh is a subsidiary of Amazon.com. It’s a grocery delivery service available in many American cities, as well as Berlin, Hamburg, London, Munich, Tokyo, and some cities in India. Acquisition of JC Penney should not come as a surprise.
Amazon recently enjoyed its biggest quarterly physical store sales increase since its 2017 deal for the national natural and organic supermarket chain.
The reported discussions between Amazon and JC Penney indicates that there may be a bit of maneuvering for deals behind the scenes—particularly as retailers and brands in a liquidity bind may make sweet deals with those that have money to spend.
In other merger and acquisition headlines, Uber Eats parent company Uber has reportedly made an offer for its smaller rival Grubhub in a potential merger that would make it the biggest food delivery platform in the United States – the Amazon and JC Penney’s of food delivery.
“We continue to actively assess strategic opportunities and believe the disruption caused by Covid could lead to an increase in M&A activity and the availability of attractive assets,” Scott Roe, CFO of North Face and Vans parent VF Corp. VFC , said on a conference call Friday. “The disruption underway across our sector will undoubtedly provide ample opportunities for strong companies.” Clearly, Amazon is much strong than the bankrupt JC Penney’s.
About 70% of executives say that this is a good time to invest, according to a survey of 125 consumer executives and 10 private-equity leaders this year by Kearney Consulting. The firm, which recently announced its findings, commented that it expects 2020 will be a buyer’s market. Many buyers appear to have cash, as private equity cash reached a peak of $1.45 trillion before the pandemic, according to the Kearney study. A deal like JC Penney makes sense.
“We believe we are well positioned in an economic downturn” to be an acquirer, Matt Farrell, CEO of Arm & Hammer baking soda and OxiClean parent Church & Dwight CHD , said on a recent conference call. “We have a very strong balance sheet. … The window is open.”
Although shopping doesn’t always mean a significant purchase, roughly 70% of consumer executives and about 50% of retail executives in the Kearney survey said they would be looking for targets with less than $500 million in assets. If unencumbered by creditor’s claims, the value of JC Penney’s real estate along would be over $1.4 billion. That’s a lot to swallow.
The total retail and consumer deal volume has declined 59% since 2016, to $191 billion last year. This was partially due to shifting priorities to having transactions yield “sufficient return on investment,” according to the report, citing Dealogic data.
In a cautionary note, many transactions do not result in a return on investment because buyers find it difficult to integrate targets that wind up costing them more. About 45% of executives in the Kearney survey acknowledged that their recent M&A moves had not been “accretive.” This does not appear to be a problem in the proposed acquisition of JC Penney by Amazon.
Walmart recently announced that it was closing Jet.com, the retail giant’s $3.3 billion purchase in 2016. Walmart says the reason for the shut-down is the “continued strength of the Walmart.com brand.” Walmart’s namesake U.S. e-commerce unit—led by consumers’ orders of groceries for pickup and delivery—posted a 74% sales surge, the company said.
“The acquisition of Jet.com nearly four years ago was critical to accelerating our omni strategy,” Walmart said.
The Jet.com deal moved the company’s cofounder and CEO, Marc Lore, to Walmart, where he is Walmart U.S.’s e-commerce president and CEO. Lore was credited with helping the Walmart forge partnerships and attract brands as it sought to bolster its holding to compete more aggressively against Amazon. But while Walmart has gained ground on Amazon, the shuttering of Jet.com raises many questions, such as what will happen to Walmart’s plan to use Jet.com as an urban millennial vehicle and its promise to “enable the Jet brand to be even more successful in a shorter period of time.”