Amazon made its biggest bet yet on the grocery space by announcing the $13.7 billion purchase of organic and natural foods giant Whole Foods. The acquisition of the supermarket chain will complement Amazon’s other initiatives in the $800 billion grocery industry including its nascent grab-and-go retail concept and its online delivery operations where the company has been slow to make inroads.
The acquisition by the e-commerce giant will give Amazon a commanding presence in the brick-and-mortar grocery space and allow it to expand its customer base by offering more fresh produce, meat and other products. The strong push into the grocery business comes at the same time as other traditional retailers such as Kroger have been hit by growing competition and shrinking margins.
Whole Foods has lately been under pressure from two major shareholders, activist investor Jana Partners and mutual-fund manager Neuberg Berman, who have been pushing the Austin, Texas-based grocer to sell itself. In response to the pressure, Whole Foods recently overhauled its board and made a series of changes to its business, including cutting internal costs by another $300 million, increasing targeted promotions and lowering prices.
While organic is a big draw for many retailers, the arena has become increasingly crowded as more players such as Wegmans, Walmart and Kroger expand their offerings. Once one of the only places to get organic, Whole Foods has seen the market flooded with more of the produce, often at a cheaper price.
John Mackey, who will remain the CEO when the deal with Amazon closes, said the transaction was the best option for the company and its customers and shareholders. This partnership presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending the mission and bringing the highest quality, experience, convenience and innovation to all customers.
For Amazon to make significant inroads into grocery industry, it needs to increase its footprint in so-called traditional stores and cannot just depend on its online business to do it, according to analysts. The company faces significant competition from discounters such as Aldi and Lidl, which opened its first 15 stores in the U.S. this week, and other online grocery services like Instacart.
Amazon’s stock rose 2.6 per cent on the news while Whole Foods surged 29 per cent to $42.68, topping the $42 a share offer price, a sign some in the market expected another bidder to emerge.
With the deal, Amazon could integrate Whole Foods’ estimated 450 stores across 42 states into its AmazonFresh business. Amazon also has millions of customers using its wildly popular Prime Service that could have Whole Foods items delivered to their homes.