Northwest Arkansas Democrat-Gazette
Online meets organic
Amazon to buy out Whole Foods Market in $13.7 billion deal.
SEATTLE — Amazon said Friday that it would buy Whole Foods Market for $13.7 billion, its biggest acquisition ever and a huge move into the grocery business it’s been trying to crack for a decade.
The deal, expected to close in the second half of this year, gives Amazon — which has been experimenting with various store concepts to establish itself as a food purveyor — an instant expanse of 460 highend stores across the U.S., in Canada and in the U.K.
Whole Foods, which made its name retailing organic and fresh products, had been struggling recently with stepped-up competition from Costco Wholesale, Trader Joe’s, Aldi and other grocers.
But in the hands of Amazon it would be a potent weapon against archrival Wal-Mart, the world’s largest retailer, which dominates the grocery world and has been stepping up its e-commerce. It’s also probably the largest untapped opportunity in e-commerce, said Cooper Smith, who tracks Amazon at L2, a research firm.
“If Amazon is going to sustain its current growth rate, it has to get into groceries,” Smith said.
Amazon agreed to pay $42 per share for the Austin, Texas-based grocer in an all-cash transaction, a 27 percent premium over Thursday’s closing stock price.
The acquisition of Whole Foods would be by far Amazon’s biggest purchase. Its previous record-breaker was
the $1.2 billion acquisition of online shoe retailer Zappos in 2009.
“This is a game changer,” Zachary Fadem, an analyst at Wells Fargo & Co., said. “It’s a warning shot for the food retail industry that competition likely heightens on top of an already challenging backdrop.”
The deal comes after Amazon spent nearly a decade trying to find a way into the fresh-food delivery business through various endeavors, without much success.
The deal could be “transformative,” Moody’s lead retail analyst Charlie O’Shea said, “not just for food retail, but for retail in general.”
Groceries are already a fiercely competitive business, with low-cost rivals like Aldi putting pressure on traditional supermarket chains and another discounter, Lidl, opening its first U.S. stores just this week. Whole Foods itself had launched an offshoot chain named after its “365” private label brand in a nod to the popularity of no-frills chains.
“Dominant players like Wal-Mart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks,” O’Shea said.
It’s unclear how much integration there will be between Whole Foods’ operations and Amazon’s tech-driven business. Smith, the L2 consultant, said Amazon’s technology and operational efficiency could improve Whole Foods’ operating margins. At the same time, Whole Foods’ high-income customers are likely members of Amazon’s Prime loyalty program, making the acquisition highly complementary for Amazon, he said.
For now, however, it seems not much will change: Whole Foods will keep its brand and John Mackey, its current chief executive, will remain in place. The acquisition would add Whole Foods’ 87,000 employees to Amazon’s bulging payroll, which as of the end of the first quarter had 351,000 people.
The grocery market, a $750 billion sector in the U.S., is one of the few provinces in the retail world that Amazon hasn’t managed to alter.
That’s in part because most shoppers prefer buying groceries, and especially fresh foods, in person. The logistics of moving fresh food are also complex.
Amazon introduced AmazonFresh in 2007, a service that for a fee delivers groceries to customers’ homes but that has failed to make a wide impact.
More recently the company has built various retail concepts, some with the aim of making people comfortable with the concept of buying food from Amazon and eventually nudging them to move a big part of their grocery shopping online.
Online delivery of groceries so far has been tough for any company to pull off because of customers’ concerns about the quality of meat and produce, Wedbush Securities analyst Michael Pachter said. But if customers know that what they are getting is the same as what they’d get at the local store, they are more likely to try it out.
Whole Foods, which will keep operating stores under its name, said in an email to customers that it will maintain the same standards under Amazon, including bans on artificial flavors and colors and antibiotics in hens producing its eggs.
Pachter said that if Amazon gets 20 million members of its Prime loyalty program to pay $15 a month extra for AmazonFresh grocery-delivery service, that’s 20 million people not going to traditional supermarkets. He said that these are likely the higherincome households who tend to buy more expensive brands and cuts of meat.
“The conventional grocery store should feel threatened and incapable of responding,” Pachter said.
And because customers can buy foods and bulk items like toilet paper from a single retailer, discount retailers such as Costco, Target and Wal-Mart have reason to feel threatened, too.
Wal-Mart has been trying to address some of those online threats, pushing harder into the online market to build on its strength in its stores and groceries. It announced Friday that it’s buying online men’s clothing retailer Bonobos for $310 million in cash, following a string of online acquisitions including ModCloth and Moosejaw.
“They are on offense and that is a good position to be in,” said Jefferies analyst Dan Binder, referring to Wal-Mart.
About 56 percent of WalMart’s net U.S. sales come from groceries, and the company has been lowering prices, improving private brand offerings and expanding online grocery pickup service from about 700 markets today to about 1,000 this year.
“Our customers are looking for shopping experiences that provide everyday low pricing and a mix of physical and digital channels that work best for their needs. We feel great about our position, with more than 4,500 stores around the country and fast growing e-commerce and online grocery businesses,” Wal-Mart spokesman Randy Hargrove said Friday.
Whole Foods, founded in 1978, saw its stock peak in 2013 at $65.24. The key measure that retailers look at to gauge their health, revenue at stores open more than a year, has fallen for seven quarters in a row.
Whole Foods Market shares rose $9.62, or 29 percent, to close Friday at $42.68. Shares of Amazon.com rose $23.54, or 2.4 percent, to close at $987.71. Information for this article was contributed by Angel Gonzalez of The
Seattle Times; Anick Jesdanun, Anne D’Innocenzio and Stan Choe of The Associated Press; Matthew Boyle of Bloomberg News; and Robbie Neiswanger of the Arkansas Democrat-Gazette.