Amazon announced plans to buy Whole Foods for $13.7 billion, and analysts are describing the move as a game-changer for the grocery industry.
Stock prices for Wal-Mart, Kroger, Supervalu, Costco and Target all dipped when news broke, some by about 6% and others as much as 15%.
It is unknown what all changes will come to Whole Foods, but analysts Elley Symmes, with Kantar Retail, and Brian Yarbrough, with Edward Jones, said the acquisition is the biggest disruption for the business since Wal-Mart began opening supercenters decades ago.
“It’s very negative for the grocery business because I don’t think (Amazon CEO) Jeff Bezos is going into this just saying, ‘You know what, we’re going to buy Whole Foods and just be a natural and organic grocer,’” Yarbrough said. “I think he says, ‘We’re going in, and we’re going in in a big way.’
“I think he’s got much bigger plans than that because the grocery industry is a massive industry and there’s a lot of opportunity to take share,” Yarbrough said.
Bill Bishop, chief architect for retail consulting firm Brick Meets Click, described the transaction as win-win for Amazon and Whole Foods. The idea is that Whole Foods will give Amazon expertise and a trusted brand in the fresh food space, and Amazon can help Whole Foods improve its logistics, pricing and customer data acquisition and analysis.
“I really think this is a very astute move on the part of Amazon to buy these resources,” Bishop said, “because they need them, and because they’re in a good position to use them, so to me this is one more example of these guys being pretty strategic about what they’re doing, which makes you want to respect them even more.”
Yarbrough and Symmes said they expect customer data collection will be on the top of the Amazon to-do list for Whole Foods. Logistics may take longer to iron out, particularly since Amazon has delivered less than a rousing success with its grocery delivery service.
“I don’t know that anyone at Amazon has perfected the logistics on grocery,” Yarbrough said. “I wouldn’t be surprised if they bring in some other people from the industry that have experience in the grocery industry on the logistics side, over time, because again, it is different. Flowing fresh foods is a lot different than flowing dry goods.”
Yarbrough said he expected Amazon to eventually drive cost out of the supply chain at Whole Foods, however, which may result in lower prices and may force other grocers to lower their prices as well.
Symmes speculated that pricing could change in a completely different way, bringing up the format of the company’s physical bookstores.
“You go in there, there are no price tags, it’s dynamic pricing based on whether you’re an Amazon Prime member or not,” Symmes said.
“Also, all the assortment, it’s completely curated based off most searched books, most purchased books, and it’s constantly changing. Furthermore, they localize the assortment and what their Prime members in that area are searching for.
“So think about that but in a food space,” Symmes said.
Bishop agreed that a model like that could be in the future for Whole Foods.
Much remains to be seen, but in the meantime, Whole Foods will continue to operate stores under the Whole Foods Market brand, John Mackey will remain CEO, and the company’s headquarters will stay in Austin, Texas.
The deal is expected to close before the end of the year, according to a news release.
“This partnership presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers,” Mackey said the release.
Reports of a possible sale have been swirling for months as investors Jana Partners, with an 8.8% stake in Whole Foods, and Neuberger Berman, with a 2.7% stake, publicly pushed the company to explore its options.
“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” Bezos said in the release. “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.”
In a letter to employees, made available in a Securities and Exchange Commission filing, Mackey said most Whole Foods suppliers “can expect to see increased business with us over time,” and that customers could continue to use Instacart and Shipt to buy those products.
Mackey said it was too early to say whether Whole Food items would be available online through Amazon.
The acquisition is the second-largest U.S. grocery deal on record, according to Elizabeth Lim, senior analyst for Mergermarket. It is the biggest since 2006, when Supervalu and investors bought Albertsons for $17.4 billion.