Amazon’s offer to buy Whole Foods Market for $13.7 billion could usher in a new phase of retail, with the potential for hybrid stores and an increasingly fluid sense of where goods come from and how they get to consumers.
“What we're seeing today is the evolution of retail. This is a shot across the bow,” said Robert Hetu, a research director for retail technology with Gartner.
In buying Whole Foods, Amazon suddenly comes into more than 450 physical stores in prime retail locations among upscale buyers, giving it tremendous options in terms of building out in a market it’s been eyeing for years.
The $750 billion grocery market is somewhere Amazon needs to be, both because it represents a tremendous growth opportunity and because it’s so high-touch. The average American family visits the grocery store twice a week, making supermarkets prime selling territory.
Amazon has been testing the waters in brick-and-mortar operations over the past several years as it looks to increase its market share by being where its customers want it in whatever form they want.
In the grocery realm, Amazon has opened to "click and collect" stores in Seattle where 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, 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 mini-fulfillment and distribution centers, say experts.
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 some of these places," said Brad Stone, technology 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, suggested Hetu. 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," he said. "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. In Europe
That would be a waste of prime real estate, said Gartner’s Hetu. He also can’t see Amazon using current Whole Foods stores are 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.
Amazon's largest deal ever
The $13.7 billion deal, easily the largest by Amazon, 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.
Too much power for Amazon?
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 Self-Reliance called for regulators to block to deal based on Amazon’s expanding reach and impacts.
“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.
Grocery retail is a notoriously thin-profit-margin business. And Whole Foods — often derided as "Whole Paycheck" — has struggled in recent years to keep up with emerging competitors that are expanding nationwide with cheaper items. Traditional grocery stores, such as Kroger and Safeway, have also widened their organic food selections in hopes of retaining customers who are increasingly looking to eat healthily.
Sales of Whole Foods stores that have been opened at least a year fell 2.5% in 2016.
The Austin-based company also has had to fend off encroachment into its specialty sector by other big-box stores, like Walmart, that have been increasing their food sections and adding more healthy merchandise. Discounters, like Aldi, and other online grocers have made their way in, too. The supermarket sector got even more crowded on Thursday, when Germany-based discount chain Lidl opened its first 10 U.S. stores.
“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 co-founder and CEO, said the he agreed to the deal because it is "an opportunity to maximize value" for the company's shareholders. He will remain the company's CEO.
Whole Foods Market will keep its brand name and remain headquartered in Austin.
Dissatisfied with Whole Foods' lagging sales and turnaround plans, activist investors like Jana Partners have been pinching its executives for more aggressive moves to reinvigorate the company.
Last year, Mackey grabbed firmer control after eliminating its dual-CEO structure. He promised to streamline operations by closing some stores, offer better prices, come up with ways to entice customers to buy more products per trip and invest in digital commerce.
Jana Partners bought more shares in April, becoming Whole Foods' second largest shareholder, to agitate the company's executives for further changes. Whole Foods responded by remaking its board of directors and replacing the chief financial officer.
“They’re under a lot of pressure to create shareholder value and turn back to a growth story," said Greg Wank, head of the Food and Beverage Industry Group at New York-based accounting and consulting firm Anchin Block and Anchin. "They see this as an opportunity to leverage Amazon’s incredible retail online strength to perhaps gain the growth that’s coming from all the consumers moving to online platforms,”
From Amazon’s perspective, it’s a way a quick way to grab a larger share of the grocery sector, which they’d begun with AmazonFresh and pilot stores. “It’s a quick opportunity to become a real player and start doing their favorite thing, which is clicking on Walmart’s heels,” Wank added.