Grocers left stunned as Amazon buys Whole Foods

Traditional supermarkets saw shares plunge as web colossus started a ‘frontal assault’ with £10.7bn deal

AMAZON has stunned rival retailers across the globe by sealing a $13.7bn (£10.7bn) takeover of upmarket food chain Whole Foods in a move that will propel the US online giant’s near-decade long push into the grocery market.

The deal, the largest ever attempted by Amazon, has the capacity to shake up the traditional supermarket sector as it will gain an instant physical shop presence and around one million Whole Foods shoppers.

Whole Foods Market, which was founded in 1980, has around 460 shops. These are mostly in the US and Canada but include nine in the UK.

The increased threat of Amazon to the rest of the retail landscape sent rivals’ shares tanking yesterday.

Around $13bn was wiped off the value of Wal-mart, the owner of Asda and the world’s biggest retailer, after its shares dived by 7pc in reaction to the Whole Foods swoop.

In London, Tesco and Morrison’s shares closed lower while Ocado’s stock see-sawed as investors fluctuated between whether the deal could herald its destruction or a future approach by Amazon.

“The drop in Ocado shares on the threat of greater competition from Amazon could eventually present an opportunity,” said Jasper Lawler, senior analyst at London Capital Group.

“Given Amazon’s spending power and already large footprint in the UK, the Whole Foods purchase probably increases the odds of an Ocado acquisition.”

Analysts at Jefferies added: “Plummeting share prices across US and European grocers point to investors concluding that Amazon will use this as a platform for a frontal assault on the category, and strongly pressurise legacy players in the process.”

Amazon was first linked to a potential takeover in April when reports surfaced that it had considered buying Whole Foods, which is known for its organic produce, following a drop in its share price last autumn.

The upmarket grocery chain has come under intense pressure from faltering sales which has led activist firm Jana Partners to build an 8pc stake and publicly call for the company to consider a sale.

Just two days before Amazon’s takeover was announced, Whole Foods founder, John Mackey, accused Jana of being “greedy ******* s” for trying to pressurise the company to sell.

Mr Mackey will stay with the business after the takeover and remain as chief executive.

He said the deal would “maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers”.

Jeff Bezos, Amazon’s founder and chief executive, said that he had been attracted to the business because “millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy”.

He added: “Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.”

An Amazon spokesman yesterday sought to play down fears that the takeover would mean the end of checkout staff and said there were no plans for redundancies. The firm recently trialled a Go store, which allows shoppers to walk straight out of the doors of a shop without queuing for a till.

Revolutions take place in stages, and the great digital march has just taken another giant leap forward. Amazon’s takeover of Whole Foods is a seminal moment in the great economic and technological transformation of our societies, and the markets know it. Even though Whole Foods is a tiny, non-mainstream player, shares of the world’s biggest retailers tumbled on both sides of the Atlantic.

This was for good reason: the mighty Amazon, one of the world’s very best companies, is dramatically upping the ante. It has decided that its pure play online grocery model in America is progressing too slowly, and is seeking to turbocharge it.

Who will it buy next? Will it make a purchase in Britain? Will it snap up bricks and mortar retailers in every major market – and if not straight away, when will it pounce? Will it decide to buy Ocado, an online firm that is still massively larger than its own Prime Now service? All of these sorts of questions will be discussed endlessly in British boardrooms over the next few days, and by institutional investors.

It was not that long ago that deluded commentators talked of the “Tescopoly” or bemoaned the supposed power of large retailers. Yet all of these companies suffered big tumbles in their stock prices yesterday on the prospect of ever greater competition.

Capitalism, once again, is playing its magic: old incumbents that thought they were protected by large barriers to entry – the need to buy and develop expensive sites in the right places – are being displaced by new players as the economics shift.

One of the intriguing elements of Amazon’s move, of course, is how digital is merging with bricks and mortar. The original online model – a pure digital set-up – is turning into a hybrid approach. Again, this is for good reason: people want to be able to shop in more than one way, and it’s implausible to think that stores will ever disappear completely. The success of companies like John Lewis in recent years has been built on a multichannel approach and concepts such as click and collect. At the same time, discount retailers that almost entirely shun the web are also thriving: Lidl has just entered the US market, for example.

Needless to say, Amazon will now be able to use many Whole Foods sites as delivery bases, not just shops, as well as pick-up sites for all of its offerings, not merely fresh food. In the UK, the move may actually help Morrisons, Amazon’s online grocery partner, at least in the short term: the US giant may feel that it doesn’t need to buy anybody to grow.

There is much going for Amazon. It has superb management. It is longtermist, albeit in a sensible and rational way. Its technology is brilliant and it is astonishingly innovative. It has mastered the art of internal incentives like no other company. It is obsessed with putting the customer first and endlessly improving the consumer experience: everything it does is designed around that central concept. Consumers want more and more choice, the lowest possible price, and the easiest possible way of getting hold of their goods as quickly as possible – and Amazon has made it its mission to fight on all of these fronts simultaneously.

But even Amazon must beware, of course. One of its great strengths is that customers want to buy everything from it because of the simplicity of making a purchase once one is logged into the system, and the knowledge that goods ordered will definitely turn up. But at some point, that advantage may vanish if new technology emerges: one can imagine a world where retail websites start to recognise consumers as they surf the web or walk along the street.

In effect, there would no longer be any need to log in and share personal information with any new website, and one of Amazon’s key advantages – the fact that its Prime customers are in effect voluntarily locked in – would have vanished. But we are not there yet, and even if that happens Amazon may have moved on so much by then that it will prove too unassailable for other reasons.

In the meantime, existing retailers have an even bigger problem. Sainsbury’s purchase of Argos looks ever more sensible; and so does Tesco’s takeover of Booker. Retailers need to squeeze out greater efficiencies.

So where will all of this end? It may be that in a decade’s time, as a byproduct of Amazon’s triumph, retail and distribution will become an ultra low margin, almost commoditised part of the economic system. If so, the power could return to producers and brands.

In the meantime, however, the story is much simpler: Amazon’s rivals must adapt or die.

‘One of the intriguing elements is how digital is merging with bricks and mortar’