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Is Target Amazon’s Next Acquisition? One Analyst Says Yes

Target

One of the most fun parts of the start of any new year is speculating about what the next 365 days might bring. Couple that with the always entertaining game of trying to guess what Amazon has on deck, and you pretty much devised the ideal New Year’s game.

Loup Venture co-founder Gene Munster kicked things off in a big way for 2018 with his prediction that Amazon will acquire Target. The deal would give the online retailer more reach into its mom and family demographic as well as a large, well placed fleet of stores, he said in a report obtained by Bloomberg.

To no one’s surprise, both Target and Amazon have been mum on the topic. But pretty much no one else has been.

Though analysts are basically in agreement that we’ll see an acceleration in mergers and acquisitions in 2018, they’re less convinced that this one will make the list.

“M&A activity is going to be through the roof this year,” said Garrick Brown, vice president of retail research for the Americas at Cushman & Wakefield. “Almost anything is possible.”

Part of what throws everything up into the air is last year’s retail apocalypse storyline, he said, which painted all stores with the same brush—and by doing so made them ripe for acquisition.

“Target is highly desirable. Their market cap is probably nowhere near where it really should be because of the dark cloud that’s on retail and retail stock,” he said, adding that same doom and gloom narrative has had as similar effect on other businesses like Nordstrom and Macy’s.

Brown isn’t convinced that Munster’s speculation will come true, but he does foresee “acquisition sprees” from both Walmart and Amazon this year. And he said Amazon pursuing a deal for a department store or big box within “the realm of possibility.”

But he does caution against drawing parallels where none exist. Though some say the e-commerce player’s takeover of Whole Foods proved Amazon has brick and mortar aspirations, Brown contends that’s not necessarily the case.

“Anyone who thinks this was just about Amazon wanting to be in bricks and mortar, I don’t think is getting it,” he said. Whole Foods allowed Amazon to solve its last mile issues with grocery, allowing it to wedge itself into densely populated urban spaces where there’s no space for distribution centers and set up costs would be sky-high. “They bought 462 potential e-grocery distribution centers.”

Jack O’Leary, an analyst at PlanetRetail RNG, agrees that the one deal doesn’t necessarily mean there are more to come—but he too isn’t ruling much out.

“I think Amazon with the right sale price, right demographics and right store network would jump at the opportunity to go after a store-based retailer, but they’re going to wait to find the perfect match,” he said.

The problem to O’Leary’s way of thinking is Target isn’t that match. Though he notes the deal would have advantages for both companies, he’s not convinced it’s the best fit for Amazon’s growth tactics.

O’Leary agrees with Munster that the demographics of the merger would make sense, especially as Amazon looks to broaden its base. Recent reports suggest Amazon’s Prime membership growth is plateauing, presenting the retailer with a challenge given that the loyalty program is the engine fueling the company’s sales. With Target, the online giant could dip more into the mid-tier.

There’d be benefits for Target too, O’Leary said. Namely, overcoming the big-box’s “false starts” in e-commerce by coming under the umbrella of the No. 1 player in that space.

Beyond the advantages and disadvantages of the two key players, the question becomes, what would this do to the rest of the market?

“[Amazon with Target would] bring the greater scale they have to bear to try to implement as much pressure as possible with their supplier base and lower prices,” he said. “Consumers will like it. For the industry, it’s definitely a challenge.”

Folding Target into Amazon’s growing empire would also strip away one of Walmart’s key competitive advantages, specifically it’s store base which offers shoppers the convenience of click and collect. While watchers speculated that buy online, pickup in store was a main impetus behind Amazon’s deal for Whole Foods, O’Leary said Target would actually give the company a bigger boost in that area given its store count, locations and history with its own omnichannel efforts.

The far-reaching effects of a potential Amazon acquisition of Target on retail and the entire supply chain is one reason both Brown and O’Leary said discussion of the deal could be a moot point. “Target, given its size, and the growth we’re seeing out of Amazon, I think there would be a higher level of scrutiny from regulatory authorities if Amazon were to purse this deal,” O’Leary said.

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