What Whole Foods Means for Amazon's Foray Into Food

first of all, I was surprised. Seems to be everybody. Yes, it seems to everybody. I mean, we should say that. Our colleagues at Bloomberg News wrote a story in April that essentially said Amazon looked it talked internally about buying Whole Foods last fall, and they decided not to pursue it. But it shows you that this has been something that's

been on Amazon's mind for a while. And the really interesting thing here is that grocery shopping is one of the biggest categories of consumer spending, but it has been very resistant to e commerce. Only about two or three percent of all grocery shopping happens online, and you know, that's the kind of thing that Amazon loves to attack. Here is a humongous market with eight hundred billion dollars in annual spending in the US alone, but it needs a kind of Amazon e commerce touch, and so that's

what we're seeing here. What is that touch? To be honest, I do not know I have, because I mean they talks about that, but a lot of people have been trying to give it this touch, this online, including Amazon. It should be said that Amazon has a something called Amazon Fresh, which is an online grocery delivery service that it started rolling out ten years ago now um and starting in its hometown of Seattle, and since expanded to a number of markets. But even by Amazon's own admission,

Fresh has not gonne extremely well. And Amazon more recently has tried some other grocery ideas. It just opened some pick up kiosks in Seattle again where you order online and then you drive up to these windows to kind of pick up your groceries. You know, it's opening a convenience store for food and other merchandise also in Seattle. So it's clear that Amazon has been very interested in grocery, but maybe not exactly sure how to do it. And to be honest, I don't know what their plans are

for Whole Foods. Do they think the future of shopping is stores, Do they think it's online? Do they think it's a mix of both. This is exactly what I was wondering. I mean, is this going to change the Whole Foods experience dramatically? Are they going to leave it as is and sort of uh, you know, jump off of that. I would bet, and this is sort of a semi educated guess to be fair, I would bet that they would for now leave Whole Foods, you know, as a grocery chain, but they would use it as

a kind of a test bed for new ideas. And I don't think that they're spending thirteen point seven billion dollars simply to buy a grocery chain. They're buying it because they want to figure out what the grocery shopping of the future is and then they want to control that and use Whole Foods as a way to kind

of get them there. They also access all of this incredible data, correct, I mean, everything that gets scanned, whether it's a stock keeping unit, that's being put on the shelf or something that's being put into a bag as you check out. You may not even have a human cashier. Yeah,

that's right. I think the data piece is is huge that they're suddenly going to get all this information not just about shopping behavior, but also about the kind of mechanics of running a grocery chain with distribution and dealing

with suppliers and things like that. Again, our our Bloomberg News colleagues wrote this big piece about Amazon's kind of grocery ambitions a while ago, and one of the revelations there was Amazon had a problem with the kind of inventory and distribution in groceries that you know, bananas would go bad and things like that. So it's also getting some expertise on the back end of running food delivery

food operations. I mean, it's interesting though that they chose Whole Foods of all places, because Whole Foods hasn't exactly been a seller example of distribution, and they've struggled with overpriced items and this has not been a grocery store chain that has done phenomenally well in the past few years. Is it because the valuation what made more sense for Amazon? Or was it because uh, they saw something else. Well,

Whole Foods has some serious advantages. One is it it has a very good brand and that's certainly something that is valuable for Amazon. And also Whole Foods was uniquely vulnerable right that it's been attacked by johnah Partners, an activist investor recently, and so you know, it was in the position where Whole Foods needed a white Knight, and Jeff Bezos, I guess, was more then happy to swoop

in and be that white night. The Amazon web services business is always cited as being this growing conglomerate inside of Amazon. Just give you twenty seconds to connect that with this purchase. Um. So, one thing that has been speculated is could Amazon Amazon's grocery ambitions be the next aws that it's if they manage to get the distribution of food right and the in store experience right, can they then sell that as software to other grocery companies.

That's fascinating, Shara Ovida, always fabulous speaking with you Bloomberg Gadfly columnists. You put it so nicely, and it really gives us a sense of what could be at stake here and why this is being treated as such an industry disruptor Shara Ovida. Her columns are awesome, go read them. They have a new executive, but it has a very big problem that is coming to the new executive, John

Flannery from Jeff Immult who just stepped down. And Katherine Klinsky, a bloom BERGNESE reporter, highlighted this in a recent story looking at how g E has a thirty one billion dollar deficit and its pension, which is the biggest among SMP five companies and this even more shockingly fifty percent greater than any other corporation in the US. Katherine, how did we get to this point? How is ge so desperately underfunded in its pension? Yeah, definitely, John Flannery has

this big hole to feel. Um, Like most corporate pensions, the financial christ really wrecked them. That was when they fell underfunded, and it's it's been a hard time trying to recoup those losses over the years. I mean, interest rates have been really poor, and even if you've invested in other assets, you know, it's been a volatile market

and it's hard to always kind of recoup those losses. Um. A lot of companies have instead and putting cash to their plans, or they've been offloading them to ensures, they've looked for kind of other solutions to try and shore up these pensions. UM. But with GE, it's just steadily trended down in terms of their shortfall. Now G has a lot of company, doesn't it. I mean it's not as if gees alone in not having a completely funded

pension plan. Some of the most recognized and largest companies in the United States General Electric is writing about but General Motors, Boeing, ex On Mobile, A, T and T, Lockheed Martin. Is there no downside legally or financially to underfunding your pension plans? So they just go ahead and don't worry about it. Yeah. So, actually, if you hold an underfunded pension plan, you have to pay more fees to the PPGC, which is kind of the government agency

that backstops these UM. So there is an immediate kind of financial cost to these plans. You know, it is important to recognize that these obligations are decades long. So if markets start to ali, yes, that might really help them, UM, as long as they're invested in the asset that actually rallies compared to the bonds that they have been buying. Because they were afraid to buy stocks. Definitely, So they I mean, they they're pretty well diverse. They have equity,

they have debt, real estate, private equity. They actually own thirty million dollars or thirty million shares of g in fact um. But it's hard to always bet on that. And a lot of companies now are starting to say, you know, we're not going to wait for markets to kind of help us. A lot of companies are taking

these actions. And you have big public pensions that have just come out out right and said, look, are long time assumption that we're gonna get seven and a half returns each year on our assets is going out the window.

We're gonna have to lower that to six and a half to six point to five percent, whatever it is, which means more contributions in the part of both employees as well as possibly, uh, you know, the actual organization, right, I mean, but what strikes me about g E is that g E opted not to do what others were doing, not to make contributions, instead to give out forty five billion dollars basically two shareholders with buy backs instead, basically

because of this activist pressure. I mean, at some point this is going to come back to bite them, because you have to wonder, are they just investing in risk your assets with the money from the pension in order to make up for the shortfall and crossing their fingers. Yeah, So they have been making some contributions about over the past two years, it's been about two billion dollars to their pension plan. But that's paltry compared to the forty

five billion they've been spending on share repurchases. And while it's you know, while the pension plan could receive a great boost from interest rates, while it might be fine in the end, we argue that, you know, it's kind of this this uh, this tension between those short term effects of hey, let's appease these activist shareholders, make sure our investors are happy with this kind of growing hole that they have on their on their balance sheet, and

it's hard to recoepe those losses. I was looks going to say, just to add to this idea that you're talking about, what these assets, what they're invested in, the various assets, because when you have interest rates that are as low as you describe, and we're all living through this um, there is no way that you're going to meet your benchmark, your target. Right, You're and that hasn't even been a sort of reality moment for many pension fund managers. Correct, correct, and um so G has lowered.

They went from about nine percent in the early two thousand's to now seven point five, but it's still that's kind of a higher assumption for the way markets are doing. We've seen a lot of pension plans um either lower those even further or take steps to kind of better match their assets and their liabilities, kind of taking a

traditional insurance view of it. Um and that has also helped at least mitigate the volatility, because sometimes you're just never going to make up those returns, but at least you don't want to. And they have to keep cashing, right, I mean, the Arissa rules say that you have to keep a certain amount of cash on hand in order

to pay out current beneficiaries. Yeah, they definitely need UM cash to be able because some of these beneficiaries are already taking payments and but a lot of those obligations are decades long, so they'll still have, you know, a bunch of assets to kind of play with for a little bit. Is she the biggest pension or a company with a pension out there, they do. I mean they

have a very sizable pension. So ninety four billion dollars in obligations and about sixty three and assets right now, what are the comparable kinds of what are the other companies with comparable pensions? Yeah, I mean it kind of sizes up with many industrial companies. Those tends to be kind of the larger pensions that we see. It's kind of those legacies of decades of kind of blue collar workers. UM, they're about sixty seven percent funded. That's kind of an

important number to recognize, is UM. You know, their their obligations to kind of their assets that they have now. UM generally pension experts say eighty percent is where you tend to want to be UM and higher if you can, but is kind of a one to shoot for. Well, I was gonna say, if you guys also get a chance. Has a great uh piece of corporate research by Bob

Coley over at Russell Investments. It's it's about this year's earlier this year, but it talks about the twenty billion dollar club, meaning you know, do you have liabilities that you're unmet by more than twenty billion and UM, well, you know you've got the General Electric as I said, General Motors, but just add to the list a T and T Dow Chemical. Well, we know what's happening there. Johnson and Johnson, thank you very much for bringing this

to our attention. Really well done and uh look forward to more. Katherine Chiglinsky, US insurance reporter for a Bloomberg Well Insulin. Insulin is one of those drugs that is life sustaining and it is sold throughout the United States at races that have increased dramatically over the last decade. Here to tell us more about drug pricing is Michael Ray. He is the founder and the chief executive of our ex Savings Solutions and he joins us from Overland Park, Kansas. Michael,

thanks for being with us. Can you comment on some moves in the state of Nevada, specifically with the Governor Brian Sandoval signing a law that is now the really the most strict requirement for the revelation of drug prices, which we strangely don't have. Yeah, it's great to be with you, Jim. I think that the legislation really shows the frustration and the desperation people feel. We've seen this public outcry about drug prices and you know, some recent

examples really focused on influence. Um. I think it just demonstrates the pain people feel, um, financially, I think that it it's something that's a threat too, you know, just common health health care for the those diabetics, and it's it's a it's a really important topic. I think that the legislation, um, you know, is a is a great first step. I think that there there's much more and it's a much more complex issue that needs to be dealt with. Well, let's just talk certainly, let's let's clarify

what this legislation actually said. The law required drug makers to annually disclose the list prices they set, profits they make, and adjustments to any kind of pricing due to inflation or otherwise, basically giving more transparency to how they set prices. Correct. Yeah, that's right, and I think from a macro approach it makes sense. But you know, the what the patient pays that the counter, coupled with what they're other therapetic options are,

and what's going to be most impactful. Basically, what I'm saying is the data you know at years N is really going to have a little impact on what consumer experiences when they go to try to buy their influence. Is this law constitutional? Again, I'm sorry, is this law constitutional?

Because I can imagine and and and just reading up on it, it it seems like some pharmaceutical companies are saying, you know, this might actually raise some some legal issues about whether whether the state can basically voiced this kind of requirement upon them. Yeah, I mean, I think it's it's uh, you know, it's kind of like bringing one stand back to a flood. Um. There's you know, it's going to have a limited effect because of the complexity

of the system. You know, we're not just talking about manufacturers, but we're talking about an entire supply chain that's disrupted or um, you know, may adjust other parameters um. And I think that even if you look at the find the five thousand dollars a day that adds up to two million bucks um, that's really not not that much money in the grand scheme of things, even if they decided not to disclosed its state. But other states have also taken this up correct Vermont, for example, asking drug

makers to justify certain price increases of fifteen percent or more. Uh, is there any reason to doubt that other states will look at this and say, gee, we want the same benefits for our UH citizens. Yeah, I think, Um, I think that's certainly possible. And again kind of back to the original point of this is on one drug or one set of drugs, Um, it's certainly important and impactful, um,

But there's a much bigger system here. And you know, even if even if every state requires them to disclose the pricing, again, it's after the fact, um, And what is it going to mean ultimately to the individual consumer at the pharmacy counter There there's a lack of information, But from a therapy standpoint and a price standpoint, that's the ultimate problem that needs to be solved, um, so

that the market forces can take over. Michael, you started out by saying that this move on the part of Nevada legislators shows this desperation of people to get pharmaceutical costs under control, and how desperate people UH feel throughout the coun treat How much is this an effort to put pressure on Washington to perhaps inject a little bit more of a collective bargating power when deciding or negotiating

with pharmaceutical companies from Medicare and medicaid. Well, I think I think that this certainly is uh, that that's part of it. You know, everyone agrees that drug prices need to go down. Everyone agrees that, you know, people should have the right to to an access to this type of care. Uh. The question is what are the dollars and cents and who does it affect and how um in it? Again, it's a very complex. You've got a supply chain that includes not just pharma but wholesalers, TBMs,

pharmacies themselves. Um, And so you've got to look at the entire system. UM. But I do think that there's you know, it's a it's a move to put further pressure on whether it's legal. I know is one question, um that I've heard said, it's you know, is this type of is this a precedent that can even be brought? Um? So I'm not sure to lead legally how that would play out. I'm sure there will be challenges to this, Michael,

just quickly. I'm also as part of this move in Nevada, UH, nonprofit organizations that are working on behalf of either patients or funding medical research, they're going to have to reveal and disclose the donations that they received from pharmaceutical companies as well as insurance providers and benefit pharmacy benefit companies. Why isn't that something that already happens. That's a great question. Again,

back to the complexity. It's a it's a very very deep web of of how money changes hands and who's changing hands from. You know, that's not a piece that I cited, but that's a fantastic example, um of of some of the you know, economic mechanics um and you know, if you're gonna have transparency, you can't have transparency just in one part. You need to have it everywhere. Thank

you so much for joining us. Michael Ray, founder and CEO of r X Savings Solutions, which is based in Overland Park, Kansas, Thank you so much for joining us. Recent data shows that the housing market recovery in the US has been incredibly uneven. Big metropolitan areas like New York City, Miami, uh San Francisco have gained disproportionately, while other smaller municipalities have lagged behind. So what does a real estate investor do with this information? Terrell Gates joins

US now. He's chief executive officer and founder of Virtues Real Estate Capital, which over sees about three billion dollars in real estate assets from Austin, Texas. Terrell, I'd love

to get your take on this. When you see this bifurcated market that appears to be slowing down right now, do you avoid those municipalities that have gained the most, like the New York's of the world and the San Francisco's or do you think that those are the areas that are most resilient if there is another downturn in the near future. Yeah, that's a good question. I mean, certainly, entrance prising are cost to buy today is a major factor and where you're going to invest and where you're

not going to invest. But you also have to think about sustainability of that income stream, and you have to think about the growth potential. And so one of the things that's been occurring over the last twenty to thirty years is this great urbanization movement of people coming back into the cities looking for more info locations, and that's driving up those valuations that you're talking about. Let's talk of if we can about some of the areas in

which you have expertise. I want to start with student housing and I'm wondering if you could maybe use an example. I know this one at Rutgers University, Rockoff Hall. Uh, maybe you could use that as an example. How did you find that property and what attracts you to the student housing market, what makes it attractive? Well, our overall thesis here at Vertices we don't invest in aditional commercial real estate. We invest in property types that we believe

our recession resilient. In other words, property types that can continue to perform even when there is an economic cycle downturn or a cappa market cycle um retreat. And we think student housing is one good example of that because when we go into recessionary period, university enrollments actually increase. Not surprising, right, because what that typically means is unemployment goes up, more people go back to school, and there's

a greater need for housing. So the Rutgers University example, that's a property that's walking distance to the main campus of Rutgers University, which is one of the largest universities in the country. There's about sixty five enrollment at all of its campuses. And for that particular property, we did

buy that one off market. It is the only private, lead built, purpose built student housing property in that particular market, and so we found it compelling because we felt like we could increase the performance of that secular property, driving

revenue from that property and ultimately driving income evaluation. Terrell, if you're going to get into student housing, though, don't you have to consider a little bit more the whole backdrop of student debt and the fact that there is this growing concern that all of these students who are borrowing all this money are going to be able to pay it back. Does it matter to the real estate investors?

It absolutely does, And you're hitting on a very important point there, because there is a very different experience and investing at different types of universities. So this backdrop of the student housing bubble, as well as online technology driving

more lower cost education, is very much a factor. But what you will see is at the major tier one public flagship universities like a Rutgers or here in Texas where I'm from, into University of Texas at Austin and texasan m university, enrollment and demand for that quality education continue to increase, and so there just isn't enough housing.

And what's happened really over the last twenty years, and I would say, over the last ten years at an even greater clip is many of these universities have said, number one, we don't have the capital because we have less state support today than we did in the past to build the housing that we need to meet meet the demand from our kids. And number two, we're not good at it. That's not what our job is. Our core competency as the university is education and research, it's

not real estate services. So they've been outsourcing that need at a much greater clip to the private sector, to groups like ours. Speak if you can about senior living properties. I know you've got some Detroit, Orlando as well as Burlington, Vermont, and then maybe just quickly on your medical office and self storage, because each of those sort of tackles uses the same strategy but tackles a different market. That's exactly right, So senior living, same thing. Everybody knows about the graying

of of America. UM, we have an even gotten even close to the peak of what we're going to see from the boomer generation, which that actually doesn't peak until about two thousand thirty three. But what we've seen is is um for particularly needs based senior living. In other words, when you gotta go, you gotta go. It's not really a question because the level of care required means somebody

can't be living completely independently. So for us, we think senior living is extraordinarily compelling because we think it is a very sustainable income stream. Because the reality is is, even if you lose your job or you have to take a lower cost job, probably the last thing you're gonna do is take your eighty six year old mom out of a senior living community that's providing a high level of care that she really needs and provides her better quality of life than she could get at home.

So for us, we think the space is uh compelling from a number of different perspectives, not only the sustainability of that income stream, but also the ability to grow it providing higher quality operations and hospitality. Tarrell, I have to think with all the money that's been going into real estate assets and the amount of cash looking for some kind of bond substitute with higher yields, I have to wonder, have you seen competition to your strategy just

balloon and have valuations dramatically? Yeah, So you know this is an interesting point, right, and and a lot of our investors asked the same question right there, saying, well, wait a minute, all these people are getting into your property types, because everybody looks over and they say, these property types, these quote unquote alternative property types, many of

which are becoming more mainstream. They have higher yields, higher total returns, historically, their recession resilient I want to get into. But what they don't quite understand about these property types is they are also more operationally intensive, and so what that means is there's more idiosyncratic risk. In other words, running a student housing property or running a senior living

property is not like running a multi family property. Similarly, running a medical office building is not like running an off buildings. So you have to have a lot of

the main expertise in these particular categories. So what's happened is is a lot of these new investors, whether it's big institutions like star Wood Capital or Carlisle or black Stone, or the sovereign wealth funds like g I C or the large pension funds, as they've come into the space, they're typically buying large portfolios, and usually there are premiums being paid for those large portfolios because they're making a macro bet on the space that it's going to continue

to perform well. We, on the other hand, we generally buy one off properties where valuations are usually a little more compelling, that also have upside potential by improving the quality of the real estate or improving the quality of the operations, and then we ultimately end up selling to a lot of these big financial groups or the reads

in larger portfolios and hopefully garnering the premium. Thanks very much for sharing all this information with this Terrell Gates, chief executive officer, founder of Vertas Real Estate Capital based in Austin, Texas. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast.

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