Amazon to buy Whole Foods for $13.7B
Deal for Austin-based grocer likely to shake up industry with online sales
Amazon bet big on grocery delivery with an offer to acquire Whole Foods Market for $13.7 billion in cash, a merger that could steer the cutthroat supermarket industry further into the online marketplace and heighten price competition in a low-margin business.
The Seattle-based e-commerce giant announced Friday that it will pay $42 a share for the Austin-based chain that built its brand on organic and natural products. It will be Amazon’s first acquisition of a chain of storefronts. The sale is expected to close later this year amid rising competition among grocers across the U.S.
Amazon is expected to press Whole Foods’ network of 460 stores, including 10 around Houston, into double-duty. Each would also serve as a warehouse for fresh food and other staples that could be ordered online and quickly delivered to local customers.
“They’re not buying stores; they’re buying mini distribution facilities,” Wedbush analyst Michael Pachter said.
The combination of Amazon and Whole Foods, which has stores across the country and in Canada and Britain, has the potential to transform a retail sector that has remained largely tethered to brick-andmortar locations as e-commerce sales pressure other parts of the industry.
The deal offered a substantial premium on Whole Foods’ stock price, which rose 29 percent on the day. The company, sometimes criticized for its pricier goods, has been challenged in recent years to boost sales and retain shoppers as more traditional grocers expand their organic and natural offerings in response to consumer demand.
“Whole Foods does have a nickname. Even to loyal customers, the nickname is Whole Paycheck. Amazon will address that directly,” said Larry Light, CEO of Florida-based marketing consulting firm Arcature. “I’d be scared if I was a competitor.”
Big effect locally
Analysts anticipate Amazon’s financial strength could enable Whole Foods to compete more fiercely on cost, potentially boosting foot traffic at its brickand-mortar stores while expanding its customer base among the click-and-order crowd.
“That combination is very compelling and formidable,” said Mickey Chadha, vice president at Moody’s Investors Service. “You get a pretty big ripple effect across the industry.”
The merger could have particular ramifications for Houston’s hotly competitive grocery market, which continues to attract major grocers looking to cash in on the region’s population growth and density. Kroger, H-E-B, Walmart and others have expanded and renovated stores in recent years to offer more fresh products and lower prices, and each is testing services such as curbside pickup of online orders.
Ed Wulfe, CEO and founder of commercial real estate firm Wulfe & Co., said he expects the pace of change to accelerate throughout the area as competitors invest more heavily in e-commerce and work harder to differentiate their chains as Amazon unfurls its plans.
“It is a giant gamechanger,” he said. “(Amazon) is such an innovative and imaginative merchandiser, and it’s going to bring that same marketing experience to Whole Foods.”
Whole Foods will remain headquartered in Austin pending approval of the deal.
A spokeswoman said it will have no immediate impact on the company’s expansion plans, which include adding more than 20 stores this year while relocating or closing some others.
Whole Foods has far fewer stores in the Houston area than most other chains, but it operates in some of the city’s most sought-after neighborhoods inside the Loop and in the fast-growing suburbs. Stores in Midtown and Independence Heights are under construction.
Pachter said the company has stores in densely populated areas throughout the country, which could eliminate the challenge of transporting perishable goods over a long distance.
He estimated the majority of U.S. households are within 10 miles of a Whole Foods Market, enabling Amazon to deliver goods with speed and efficiency.
Removing barriers
Amazon has for years dabbled in groceries with limited success. It offers AmazonFresh, a grocery delivery service, to Amazon Prime members in a limited number of markets. It’s also piloting a grocery store concept for its employees called Amazon Go.
“It’s one of the few remaining categories of retail that Amazon hasn’t been very good at,” Pachter said.
With the Whole Foods acquisition, Pachter said, Amazon could offer AmazonFresh to virtually all Amazon Prime members, who might be more inclined to try a delivery service fulfilled at a familiar, local store.
“Any impediment to a consumer trying AmazonFresh has been removed,” he said.
The deal comes at a fraught moment for the U.S. grocery industry, which faces pressure from new players and price-conscious consumers seeking fresher and higher-quality goods for less money.
Aldi, a German discount chain with a substantial national footprint, announced earlier this week a massive expansion plan as Lidl, another German discounter, prepared to open its first U.S. stores on the East Coast.
In Houston alone, Aldi plans to add as many as 17 locations throughout the region and to invest $34 million in store renovations here by the end of 2018. Lidl is reportedly eyeing locations in Pearland, League City and elsewhere.
Chadha expects the increased competition to further consolidate the industry by pushing out smaller players without the financial strength to compete on price with lower profit margins.
“You have a huge amount of pricing pressure all across the board,” he said. “The independent and the regional players are probably going to be the most squeezed because they don’t have a lot of flexibility.”
The expansion of online grocery delivery could further complicate the pricing battle, as it has in other retail sectors such as apparel and electronics. To date, the grocery industry’s foray into e-commerce has mainly involved curbside pickup and third-party delivery services such as Instacart, which recently expanded in the Houston market.
Online sales have grown more slowly in the grocery business than in other retail sectors. The U.S. Census Bureau released e-commerce penetration data for the first time in June, finding that only 0.1 percent of food and beverage sales were made online in 2015, the most recent year with available data.
Wake-up call
Amazon’s forays into grocery delivery have included online purchase and in-store pickup.
“None of those have gotten the kind of traction you would expect from such an enormous category like grocery,” said Richard Kestenbaum, a partner at Triangle Capital. “Part of that is that no one has found the right formula yet.”
That will include a mixture of an online portal and physical stores, Kestenbaum said.
“I think this acquisition will wake up the existing grocers that they’re late,” he said.
At Walmart, the country’s largest grocer with about 56 percent of the company’s $357 billion revenue last year coming from groceries., e-commerce sales shot up 63 percent in the first quarter, compared to the same period in 2016. To boost e-commerce, a spokesman said, Walmart plans to add product pickup spots in 1,000 stores by the end of the year, up from 670 in the first quarter.
Still, Walmart stock fell 5 percent following news of the Amazon-Whole Foods deal.
H-E-B also offers its own online delivery service shipping products to 46 states and offers curbside pickup at 17 Houston stores, a company spokesperson said.
A Kroger spokesperson said that company’s focus on customers enables them “to compete and win in an ever-evolving landscape.”
Other major grocery stocks fell sharply Friday. Kroger’s stock plunged 11.4 percent, Costco was down 5.9 percent, Walmart 5 percent and Sprouts 6 percent.
Meanwhile, Amazon shares closed at $987.71, up 23.5 percent for the day.
The Whole Foods concept sprouted in 1978 as a small natural vegetarian foods store in Austin. Through a succession of acquisitions, the store donned its current name and spread throughout Texas then to California by the late 1980s, acquiring similarly themed natural stores as it went.
Whole Foods opened its 100th store in 1999, and its holdings now include the largest grocery in Manhattan. In a report last month, real estate services firm JLL said Whole Foods claimed the second-largest share of grocer growth in the U.S. in 2016, after Aldi.