Amazon hasn’t been shy about its desires to push into grocery — but it has just made a big and definitive move. The e-Commerce giant will acquire Whole Foods Market for $13.7 billion in an all-cash transaction valued at $42 per share, scooping up the brand’s 431 stores and logistics capabilities.
The acquisition marks Amazon’s largest transaction ever, and it shows that the company’s grocery ambitions reach far beyond the AmazonFresh pickup locations presently being tested in Seattle.
The AmazonFresh grocery delivery business will likely play a major role in the positioning of the Whole Foods brand going forward, as Whole Foods produce could be delivered to Prime members. For a company that was beginning to suffer from a lack differentiation from competitors, Whole Foods now will have easy access to its own consumers as well as Amazon Prime members, which now total approximately 80 million, doubled from one year ago.
“Whole Foods will definitely be able to have a more efficient supply chain and reach more consumers just because of Amazon’s size,” said Madeline Hurley, Industry Analyst at IBISWorld in an interview with Retail TouchPoints. “They’ll probably be able to experiment more with their 365 concept stores and be able to open more of those. Obviously, they have the backing of the online infrastructure now, so they can expand more of their offerings online. They use Instacart currently, which I don’t foresee being part of their future if the acquisition goes through, since they would integrate the AmazonFresh service.”
The move surely benefits Amazon, giving it more market share in the grocery sector (jumping from 0.9% to 2.6%) and more access to the consumer’s grocery wallet. Amazon also gets to optimize its buy online/pick up in-store capabilities on a grander scale than it previously has at its own grocery test locations.
“Amazon has dabbled in buying online picking up in lockers and just started AmazonFresh pickup, but never had a physical presence allowing for customers to come to Amazon locations for pickup and avoid their highest cost driver: shipping costs,” wrote Ryan Craver,Chief Digital Officer of Lamour and Founder of Commerce Canal, in a blog post.
Craver also noted that the physical presence of Whole Foods stores provides more flexibility around what could be sold, similar to the way Amazon enables third parties to sell within their own marketplace: “With the additional brick-and-mortar space, I wouldn't be surprised to see Amazon lease or consign unit space to sellers looking to sell product both online and in-store,” wrote Craver. “Sellers can use that shelf space for marketing a product to the Amazon customer beyond just the site and apps."
Competitors Feel The Heat
Stock prices of major grocers on the morning of June 16 reflect that the acquisition surely puts the rest of the sector on the defensive. As reported by Business Insider, Amazon’s stock jumped 3.48% to $997.70 by 10:09 am. Here are results from competitors in the grocery space:
Walmart: Down 5.74% to $74.38;
Costco: Down 7.46% to $166.63;
Kroger: Down 11.16% to $21.90;
Target: Down 7.77% to $51.15;
Supervalu: Down 17.2% to $3.08; and
Dollar General: Down 6.36% to $67.72.
“This basically makes things more price competitive,” Hurley said. “Instead of two players serving two different markets — Amazon doing online grocery and Whole Foods doing the specialty brick-and-mortar — other retailers will have to deal with one major player. They’ll have to watch them more closely since they’re now competing with one company serving two channels. Whole Foods shoppers will be interested to see if the company maintains its specialty focus or goes for more of its 365 limited format that is similar to Trader Joe’s. A lot of the growth in the grocery industry is from those limited format stores and online as well, so now it comes down to whether or not Whole Foods dumps their ‘Whole Paycheck’ brand reputation.”
Amazon's offer represents a 27% premium over Whole Foods' closing price on Thursday. The transaction’s completion is subject to approval by Whole Foods Market's shareholders, regulatory approvals and other customary closing conditions. The parties expect to close the transaction during the second half of 2017.
Whole Foods has been under pressure from hedge fund Jana Partners and wealth management firm Neuberger Berman, which have called on the upscale grocer to sell itself. The investors have criticized Whole Foods for its poor financial performances in recent years — including seven straight quarters of comparable sales declines — and have suggested the chain could be merged with another grocer. Kroger had been rumored to be interested in purchasing Whole Foods Market in October 2016.
With Lidl opening its first U.S. stores on June 15, Aldi investing $3.4 billion into a massive U.S. expansion and Walmart escalating an industrywide price war, the Amazon-Whole Foods news is just another twist — albeit a big one — in a sector that will continue to see massive changes in convenience and pricing.