The “disruption” days are over – it’s time for some brutal, old-fashioned competition

Whole Foods is an upmarket US grocery chain that sells expensive, high-quality produce with a focus on the ethically-sound, organic end of the market.

It accounts for about 1.2% of the US grocery market. And in recent years, it’s been struggling.

Until now. Today, this relatively small, niche, expensive supermarket chain has rivals across the globe – not just the US – quaking at the checkouts.

Why? Because it’s being bought out by Amazon, the destroyer of industries…

The market can’t wait for the bit where Bezos rips his face mask off

I love Amazon.

I love that I can order something I want and get it pretty much instantly (if it’s digital) or near-instantly (if it’s physical). I love that the process is so frictionless. It’s been a decade and yet no other online retailer has quite managed to make the process of buying stuff quite as effortless as Amazon does.

It is clearly a great company. Jeff Bezos is clearly a genius.

But everyone knows that. But while it’s a great company, it’s also an expensive company. Amazon is valued, as far as I can make out, on the idea that one day it will effectively have a global monopoly on everything.

At that point, Bezos will rip off his consumer-friendly facemask to reveal the glowing red eyes and horns of a heartless industrialist beneath, and will jack up prices to become the most profitable company on the planet. In effect, Amazon’s current valuation makes perfect sense if you believe that it will one day be the “company store” for the entire planet.

Am I exaggerating? Maybe a bit.

But you need only look at the reaction to Amazon’s purchase of bricks’n’mortar grocery chain Whole Foods to see what I mean. Usually, when a takeover deal is announced, the target’s shares soar and the acquirer’s drop.

In this case, Whole Foods’ shares soared (naturally), but Amazon’s went up too – the company’s market value jumped by more than $14bn when the deal was announced. Meanwhile, shares of Wal-Mart, Costco and other retailers tumbled. In fact, according to Recode, the grocery chain sector in the US lost $22bn in value, because Amazon decided to spend little over half that amount breaking into the sector.

Share prices even tumbled in the UK. Think about that. The share price of one of Britain’s most successful supermarkets panic-sold because Amazon bought a small US grocery chain.

That’s because the market sees this as the next leap forward in Amazon’s relentless, ruthless march towards global monopoly. Today, Whole Foods; tomorrow, the world.

Is that realistic?

Amazon has come across a moat that it can’t just ignore

Let me make something clear before I say this – there is no easy way to beat the market. If you want to make money over the long run then the only “easy” option is to put your money in a tracker fund and make sure you have a decent chunk of time to let it grow.

However, if you do want to have a hope of beating the market, one critically important thing to pay attention to is the gap between the fundamentals (“reality”, for want of a better word) and expectations (the future reality that the market is currently pricing in).

When that gap – the mismatch between expectations and fundamentals – becomes a chasm, that’s when you want to be pricking up your antennae. When the market is betting all its chips on one outcome, you want to think instead about how it might end up being disappointed.

This is why contrarian indicators such as the magazine-cover indicator (having a definitive, huge market forecast, or an interview with a hot CEO on the cover) are worth watching. And big, headline-grabbing deals are worth watching too. Like this one.

There are a couple of points to make here. For now, we’ll assume the deal goes through – whether it does or not is a bit beside the point for our purposes.

Firstly, even a company as well run as Amazon has execution risk. Whole Foods is a “cuddly” employer (by American standards). Amazon is not. Whole Foods sells expensive stuff. One of Amazon’s big drivers is a focus on squeezing profit margins to the benefit of consumers. So it’ll be interesting to see how the two cultures rub along together – or don’t.

Secondly, and more interestingly, is what this says about physical networks. Amazon’s big selling point has always been its absence of “legacy” costs. You order stuff on the digital platform and it comes straight from the warehouse to your front door, with none of that expensive, messy, physical shopfront business in between.

But now Amazon has gone and bought a lot of shops – roughly 460 of them. This makes sense on a lot of levels. Storing and delivering imperishable and digital goods is a very different logistical challenge to dealing with fresh food, and as one analyst points out to the LA Times, these shops come with back rooms and cold storage, which gives Amazon storage capacity “within ten miles of probably 80% of the population” in the US.

You may be thinking: “But that sounds like a good thing”. And it is. But do you know who else has a refrigerated logistics network servicing big chunks of America? Every other supermarket chain in the country, including the granddaddy of them all, Wal-Mart.

By buying Whole Foods, Amazon has acknowledged that there are elements of food retail and distribution that it can’t just “disrupt”. In effect, it’s joining the fray, rather than bypassing whole sections of the industry.

Here’s another way to look at it. In other industries – such as publishing – Amazon took one look at the protective moats built by its competitors (high print costs, deals with book sellers, the proliferation of “gatekeepers”), and said “You don’t need those any more”.

In food retail, Amazon has found one moat – the logistics and distribution network – that it can’t simply leap over. Instead, it has to take these guys on, and do it better than they do.

Now, maybe Amazon can do that. It’s great at logistics after all. And it can certainly exploit its ubiquity as a shopping platform to acquire more market share quickly. And Bezos can afford to experiment.

But equally, it suggests that maybe the assets of all these “legacy” industries aren’t quite the white elephants that everyone worries they are. And that maybe these “dinosaur” businesses still have something going for them.

In short, the contrarian way to look at this is that this symbolises a turning point, where newfangled “disruption” and all the mystique that goes with it, gives way to good old-fashioned, messy, dirty “competition”.

And what would that mean? It would mean that anyone pricing Amazon on the basis that it will take over the world easily is wrong. And it would mean that anyone pricing the likes of Wal-Mart and the wider sector (as well as its associated sectors, such as commercial retail property) for extinction is wrong too.

I’ll be looking at the implications of that in more detail later this week in MoneyWeek Unlimited, our Friday email that goes out to MoneyWeek magazine subscribers only. (If you’re not already a subscriber, sign up now.)