Amazon to Take A Stake in SpartanNash

In connection with an ongoing business arrangement with Amazon, food wholesaler SpartanNash has issued warrants to an affiliate of the e-commerce giant to purchase up to 5.4 million shares of the company over the next seven years.

The agreement gives Amazon the potential to acquire nearly 14% of the Grand Rapids, Mich.-based company’s outstanding shares for about $96 million over time at a price of $17.7257 per share upon vesting. SpartanNash stock closed at $17.02 per share Oct. 8 and soared to over $21, a nearly 25% jump, in early trading Oct. 9.

Grand Rapids, Mich.-based SpartanNash has been working with Amazon since 2016, helping to supply its Amazon Fresh delivery business. The new agreement comes as the Seattle-based e-tailer is believed to be on the verge of a major expansion of a new physical store, also known as Amazon Fresh. The first Amazon Fresh store opened last month near Los Angeles, but hundreds are more are expected, sources say.

The wholesaler detailed the warrant late Thursday in a filing with the U.S. Securities and Exchange Commission. The warrant vested with respect to 1,087,455 Warrant Shares upon issuance, with the remaining shares to vest in accordance with the terms. Any unvested portion of the Warrant will not vest subsequent to the termination of the agreement in accordance with its terms, the filing said.

Related:Seven Ways Amazon Fresh Is Winning Over Customers

Mark Shamber, SpartanNash CFO, in an email confirmed that SpartanNash has been distributing ambient, fresh and frozen foods to Amazon since 2016 but declined to comment specifically as to where it would be a supplier of goods to the big company. Asked whether it would be accurate to describe SpartanNash as a “primary wholesaler” for the new grocery chain, Shamber  replied, “That would be a better question for the Amazon team. We do not have details regarding their sales and our relative proportion of our volume to their sales.”

An Amazon spokesperson declined to comment beyond what was shared in the filing.

Karen Short, a Barclays analyst, said in a note to clients that the business agreement calls for Amazon to commit to making $8 billion in purchases through the life of the warrant agreement but added the new business “would need some time to ramp and wouldn’t necessarily be straight line on volume growth.”

That would also be consistent with store expansion, even as Amazon has publicly acknowledged only a few such units on the way.

“We view the opportunity with Amazon as a potential game changer for SpartanNash, with Amazon potentially becoming one of Spartan’s largest customers,” Short added.

Burt P. Flickinger III, a managing director of Strategic Resource Group—and a veteran of the food wholesaling business through his family’s since-sold S.M. Flickinger Inc.—interpreted the agreement as a significant partnership that like Amazon’s new entry into physical grocery, could have industrywide impacts.

 “This is a beachhead position for Amazon to build and expand a long-term, productive and constructive partnership with SpartanNash,” Flickinger told WGB in an interview.

And while its not usual for retailers to invest in wholesalers as part of supply agreements, he said the contemplated 14% stake was relatively significant.

“That is a considerable position, because most times when companies take a position to co-invest it’s between 4.9% to 9.9%, so to go over 10% is significant,” he said.

The deal will give Amazon the opportunity to benefit and learn from Spartan’s expertise in areas like private brands, military commissary distribution and retail relationships with branded goods—the latter Flickinger considers to be a “painful achilles heel” for Amazon’s other physical grocery chain, Whole Foods Market. Whole Foods, which Amazon acquired in 2017, has a separate supply agreement with a SpartanNash rival, United Natural Foods Inc.

According to Flickinger, who said he reviewed the Whole Foods-UNFI deal while advising a potential acquirer of Whole Foods back then, said he understood nothing in the UNFI-Whole Foods deal would prevent Amazon from working with grocery wholesalers on a different food retail concept.

He also said he believed the deal could represent the potential for further moves among grocery wholesalers, particularly as Amazon grows its retail food business behind the new banner. As in retail, wholesale has been steadily seeing share accumulate among a smaller number of larger players, with Spartan’s acquisition of Nash Finch Co., Supervalu’s recent buying spree and subsequent sale to UNFI among the key deals.

UNFI’s Supervalu deal also diversified the company so as to rely less on Whole Foods as a percent of its business in the event it departs when its agreement expires in coming years, sources have noted.

This story was updated from an originally published version with additional comments from Mark Shamber, Amazon and Karen Short.