On Friday, Amazon announced their purchase of Whole Foods in a $13.7 billion deal; amazons largest acquisition to date. Amazon agreed to pay $42 per share in cash for Whole Foods, a 27 percent premium. Amazon is looking to turn the high end grocer into a mass market merchant in an attempt to upend and innovate the struggling retail industry. A majority of Whole Foods stores operate out of affluent urban neighborhoods, where consumers have a high likelihood of being upper-income customers who also have a Amazon Prime membership. Amazon and Whole Foods both cater to younger consumers as well as the affluent.
Once dominated by a handful of big chains, the US grocery industry has been struggling to keep up with new competition. Almost 20 grocers have filed for bankruptcy these past three years, as regional chains such as Trader Joes and Wegmans expand into new markets and delivery services like Instacart gain popularity.
Amazon has for years struggled to enter the grocery market, testing a variety of grocery innovations in hopes of competing with powerhouse retailers such as Walmart. Whole Foods has more than 460 stores throughout the United States, Canada and Britain; helping transform the company that pioneered online shopping, controlling 43 percent of online retail sales in the US, into a merchant with physical locations located in hundreds of American neighborhoods across the country.
“This deal should leave no doubt that Amazon is deadly serious about dominating all aspects of retail. Amazon is effectively saying that if retailers are going to tool themselves up with technology, then they will tool themselves up with a physical presence and high-street brand,” said Paul Cuatrecasas, chief executive of a London-based investment banking firm.
The grocery business sees about $800 billion a year in the United States. Amazon’s purchase of Whole Foods represents an escalation in the company’s battle with grocery retailers, such as Walmart; who have made attempts to challenge Amazon in the online market. Walmart recently announced their purchase of Bonobos for $310 million, and last year paid $3.3 billion for Jet.com.
“Make no mistake, Walmart under no circumstances can lose the grocery wars to Amazon. If Walmart loses the grocery battle to Amazon, they have no chance of ever dethroning Amazon as the largest e-commerce player in the world,” said Brittain Ladd, a former consultant for Amazon’s grocery business.
Amazon currently offers grocery delivery services in a limited number of markets, but faced trouble with expanding since its current distribution centers are set up for dry goods, not perishables. Whole Foods provides the solution to much of Amazons issues, providing stores that have the ability to be turned into distribution hubs; delivering groceries and serving as pickup centers for consumers. Leaked internal plans from Amazon have shown the company wants to open 2000 grocery stores across the country over the next decade.
“Supermarkets will now have to contend with not only competition with each other and non-traditional grocers like Wal-Mart Stores Inc and Target Corp, but with a retailer like Amazon which has the financial capacity to price aggressively,” said Mickey Chadha, vice president and senior credit officer at Moody’s Investors Service.
One of the biggest issues between Whole Foods, or ‘Whole Payceck’ as some customers have described the store, and consumers are the high prices charged for products. With Amazon, analysts have predicted prices would decrease. Amazon has been known to make it shopping more efficient and slashing costs. Head of Amazon research at L2, Cooper Smith, expects Amazon will apply that model to the Whole Foods system
“If Amazon can instill more efficiency in the Whole Foods supply chain, it will mean lower prices for Whole Foods customers,” Smith said
Under its deal with Amazon, Whole Foods would continue to operate under it’s existing brand, John Mackey would remain chief executive, and the company will keep its headquarters in Austin. Amazon and Whole Foods expect to close the deal during the second half of 2017.
Shares of the biggest supermarket chains fell by about 6% when the deal was announced. So far, the deal has been positive for Amazon. Usually acquisitions and a loss of money go hand in hand for big companies, but Amazon immediately gained over $14 billion on its market capitalization when the deal was announced; more than the $13.6 billion the company plans to pay for Whole Foods.
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