Amazon's Purchase of Whole-Foods

The hype generated by Amazon’s purchase of Whole-Foods for $13.7 billion has been palpable and enduring. It has afforded the behemoth online retailer a key entry point into the grocery business, a collection of stores from which it can evolve its e-commerce footprint, and an opportunity to gather valuable shopper data it could use to further disrupt the $800 billion food retail industry. Indeed, when the news first broke on June 16, Amazon’s stock price rose 2.4%, increasing its market capitalization by $11 billion. At the same time, the price of SuperValu plummeted 14.4%, Kroger dropped 9.2%, and Sprouts fell 6.3%.

Whole Foods is best known for its organic foods, building its brand on healthy eating and fresh, local produce and meats. It has also long been caricatured as “Whole Paycheck” for the high prices it charges for groceries. That conflicts with a core tenet of Amazon, which has made low prices part of its mission as a retailer.

This acquisition seemed to signal a tidal change in grocery retail that has left many wondering what the larger impact will be on the industry. For all the advantages Whole Foods potentially brings, however, there is looming uncertainty as to how much Amazon, an online giant that has never run a grocery company, will benefit from an inefficient, slow-to-adapt retailer with 460 stores and a major pricing problem.

According to sources interviewed by Food Dive, Amazon could do a lot to improve Whole Foods’ operations, given that it is strong in many areas where Whole Foods has struggled. But early reports that Amazon wants to leave Whole Foods as-is, including keeping the contentious John Mackey in the CEO post he’s occupied for nearly forty years, could prove problematic. If Amazon does prove to be a more active manager than it has with other acquisitions, the inexperience factor, not to mention a vastly different corporate culture, could make for a rocky relationship.

Analysts speculated that Amazon could use its $99-a-year Prime membership service, which gives customers free, two-day shipping and other benefits, to offer Whole Foods customers a better price on groceries, as it does for books in its bookstores. The stores could also serve as an advertisement to get more customers to sign up for Prime; in September the financial firm Cowen & Company estimated that Prime had 49 million subscribers in the United States, representing about 44 percent of households.

Amazon has been on a multiyear offensive to open warehouses closer to customers so it can deliver orders in as little as two hours, and Whole Foods stores will further narrow Amazon’s physical proximity to its shoppers. The stores could become locations for returning online orders of all kinds. Amazon could also use them to cut delivery times for online orders.

The $13.4 billion deal, which does not include net debt, immediately raised questions about whether Amazon’s experiments with automation, like the cashier-less checkout technology it is testing in its Amazon Go store, could eventually lead to job losses at Whole Foods stores.

Even with the bigger physical presence Amazon will gain through Whole Foods, it will have far less reach than Walmart and its Sam’s Club warehouse chain, which together account for about 18 percent of the grocery market. Walmart has almost 10 times the number of stores as Whole Foods does.

If the deal goes through, Amazon and Whole Foods will still only account for about 3.5 percent of grocery spending in the United States, making it the country’s fifth-largest grocery retailer, according to estimates by John Blackledge, an analyst at Cowen & Company.


Read More:






Leave a comment