Whole Foods shopper is Amazon shopper, analyst says
customers can order online and then drive through to have their groceries loaded directly into their cars at a predetermined time. It also has a concept Amazon Go store near its headquarters in downtown Seattle, where customers don’t have to check out at all as sensors and cameras automatically charge consumers for items they pick up and carry out.
But acquiring Whole Foods, with its 450 stores nationwide, represents a dramatic departure from its early business model founded on online retailing and related technology.
The physical piece is key. The vast majority of supermarket customers still want to see, touch and feel what they buy. Research by the NPD Group found that even among people who buy groceries online, 74% of their food dollars are spent in brick and mortar stores.
Amazon could do a lot with that real estate, finding ways to give customers options without having to turn stores into minifulfillment and distribution centers, experts say. That could mean ordering online or ordering a portion of your grocery list online.
“Get it all delivered to your home or come in and maybe they put a little Amazon Echo and Amazon Fire Tablet showroom in
AMAZON’S LARGEST DEALS
Amazon’s $13.7 billion purchase of Whole Foods is its largest deal to date. WHOLE FOODS ZAPPOS TWITCH GRAIL KIVA SYSTEMS some of these places,” said Brad Stone, tech reporter for Bloomberg and Businessweek and author of The Everything Store: Jeff Bezos and the Age of Amazon.
Another possibility would be creating mini Amazon Go stores within or next to Whole Foods stores, Hetu suggested. Such stores would have a much more limited stock but would be quick and easy and appeal to both the busy and the young.
The purchase could also allow Amazon to further build out its in-house brands, incorporating popular Whole Foods items that already have strong customer recognition and loyalty.
Whole Foods is a well-targeted acquisition because the Whole Foods shopper is the Amazon shopper, said Cooper Smith, an Amazon analyst with business intelligence company L2.
“Amazon’s strategy is to be the top grocery store for the coastal cities that are really Prime territory,” Cooper said, referring to its $99-a-year shopper membership program. “Think San Francisco, New York, Boston, Austin. That’s their ecosystem. That’s where the Prime members are.”
Amazon also could be looking at Whole Foods for more than just selling groceries. With its stores often placed in well-heeled neighborhoods, the deal makes a “huge leap ahead” possible, said Phil Lempert, a food marketing analyst. “This gives them a place for Amazon lockers, for pickups. There’s a ton of stuff they can do with this real estate.”
What analysts don’t expect to see is Amazon closing a lot of Whole Foods buildings in order to create what are known as “dark stores.” These are supermarket item fulfillment centers specifically organized to make picking customer orders efficient but not open to customers.
That would be a waste of prime real estate, Hetu said. He also can’t see Amazon using current Whole Foods stores as fulfillment centers. “The whole point of Whole Foods is the browsing, the experience, the environment. I can’t see them having a bunch of people on the floor picking online orders,” he said.
The $13.7 billion deal will pay $42 per share in an all-cash deal. That’s 27% higher than Whole Foods’ Thursday closing stock price of $33.06. Despite Amazon’s seemingly incongruent move, investors applauded the acquisition. Shares of Amazon rose 2.4% to $987.60 in trading Friday.
Other grocery stocks plummeted as investors contemplate an imminent industry shakeup and looming competition from Amazon. Kroger fell 13.4%. SuperValu was down 16%. Costco sank 7.5%.
The deal requires approval by Whole Foods’ shareholders and regulators. The companies expect the deal to be completed in the second half of 2017. Amazon has to pay Whole Foods $400 million if the deal is not completed.
Some feel the move will make Amazon too big. The New America Foundation believes Amazon already wields too much power over America’s markets for books and music and could worsen the already severe damage it feels the company is doing to America’s competitive, open market system.
The Institute for Local SelfReliance called for regulators to block the deal based on Amazon’s expanding reach and impacts. Others disagreed. “If you look at the whole grocery world, Amazon is a relatively small player, as is Whole Foods. I don’t see any red flags on antitrust grounds,” said Nicholas Economides, a mergers and acquisitions professor at New York University’s business school.
As long as Walmart, Kroger and Supervalu continue to operate, making an antitrust claim is difficult, said Rick Herbst, partner-in-charge of Sikich Investment Banking.
“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” Amazon CEO Jeff Bezos said in a statement. “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.”
John Mackey, Whole Foods cofounder and CEO, said he agreed to the deal because it is “an opportunity to maximize value” for the company’s shareholders. He will remain CEO.