Amazon (AMZN) bets the bank on Whole Foods in $13.7 billion-dollar deal

Amazon increased its market reach with today’s announced acquisition of Whole Foods, the hoidy-toidy organic grocer pioneer with 456 stores across its chain.

The deal is worth $13.7 billion, Amazon’s (AMZN) largest acquisition to date, in fact it is almost 70% bigger than the companies remaining acquisitions combined.

Whole Foods had already been the subject of acquisition interest from Amazon last year, but Amazon decided not to make an offer at the time. Then at the end of April 2017 when Cerebus Capital Management, owner of Albertsons, weighed the possibility of a bid and then unceremoniously walked away, Amazon renewed its interest.

The reason? Jeff Bezos has been eyeing the $700.0 billion-dollar grocery market for some time now, and even though the e-tail giant has been delivering food via its Fresh service for a decade now, it has failed to make any significant headway into the sector.

Beyond opening a new market, this purchase shores up Amazon as Walmart and other retail chains make further inroads into online retail, gobbling up market share once reserved for Bezos’ multi billion-dollar baby.

Amazon’s announcement bodes well for Whole Foods, which has struggled over the last decade to add growth and has seen same-store sales drop for the last seven quarters in a row. So, it isn’t surprising that SP for Whole Foods climbed 29.1% by the end of trading today.

Even Amazon shareholders got a bump as Amazon stock climbed 2.44% to $987.71 per share.

The news didn’t make everyone smile though. The groceries sector took a hit across the board with Kroger, iconic American retailer based out of Cincinnati, Ohio, dropping 9.24% to $22.29 per share and Costco, the largest American membership-only warehouse club, dropping 7.19% to $167.11 per share.

Goldman Sachs even downgraded Costco because of the acquisition announcement, where analyst Matthew Fraser wrote to clients, “COST’s competitive edges have related to natural and organic and its membership model, which despite significant overlap with AMZN Prime offered an option focused on consumables not easily available via AMZN.” With the Whole Foods acquisition “AMZN is likely capable of offering superior pricing and delivery competency vs. incumbents.”

Book publishers didn’t take Amazon seriously at first and as a result, in 2014, Amazon clocked $5.25 billion in annual revenue from book sales. Also in 2014, 19.5% of all books sold in the U.S. were Kindle titles. E-books were making up 30% of all book sales and Amazon had a 65% share of that segment. Traditional booksellers took a bloodbath.

Now grocers anticipate the same future.

With Amazon talking about bringing its drone force online to facilitate near instantaneous delivery of perishable goods, what will happen to the grocery chains we grew up with? How will this deal impact mom-and-pop cornerstores? Should one company have this much control over retail?

 

–Gaalen Engen

http://twitter.com/gaalenengen

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