Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

It seems Jeff Bezos is serious about the grocery business. 

Amazon spent years essentially dabbling in the $795 billion annual U.S. market for food and beverages. Amazon started its own grocery delivery service, Amazon Fresh, 10 years ago in its hometown of Seattle. It expanded into other cities, but the grocery delivery business never got the big push that typically signals Amazon is dead serious about a new category. Bezos also has been testing concepts for physical grocery and convenience stores, and it recently opened kiosks for commuters to pick up groceries they had ordered online.

All of this, though, seemed as if Amazon.com Inc. was dipping its toes in the supermarket waters. Well, Bezos has taken the full plunge now. The company agreed to spend $13.7 billion to buy the grocery store chain Whole Foods Market Inc., which has more than 450 stores, mostly in the United States.

Until Friday's announcement, Amazon's largest acquisition was the $1.1 billion it agreed to pay for shoe seller Zappos in 2009. Amazon has so far controlled a tiny fraction of market share in America's highly fragmented grocery business. It's safe to say Bezos is using Whole Foods to speed up his ambitions to shake up food shopping -- one of the last areas relatively untouched by e-commerce. Without question, Amazon is the most interesting and ambitious company in the tech industry right now. Buying Whole Foods turns up the ambition dial even more.

Splurge
Amazon's $13.7 billion purchase of Whole Foods is the biggest acquisition by far in the company's 23-year history
Source: Bloomberg and Amazon

Bloomberg News had reported that Amazon looked at Whole Foods last fall but didn't pursue a deal. Since then, Whole Foods has been under investor pressure to reform a struggling business or sell. That likely made Amazon a more willing buyer and Whole Foods a more receptive seller. But I didn't believe Amazon would really buy Whole Foods. As Bezos often does, he pulled out a stunner. You be you, Jeff. You be you. 

Grocery shopping is an incredibly intriguing category now for Amazon because it accounts for about 30 percent of total U.S. personal spending excluding some categories such as cars and energy, Morgan Stanley has estimated. But only a few percentage points or so of all grocery shopping happens online, according to analysts' figures. Amazon loves giant markets that it can turn upside down and reinvent, and groceries certainly fit the bill. 

What's unclear is how Amazon will run a chain of grocery stores. Amazon said on Friday that it would leave Whole Foods in the hands of its CEO, John Mackey. That makes sense, at least for the short term. It's unlikely Amazon has in-house expertise to run a sprawling chain of stores. Amazon hasn't said anything so far about what it plans to do as Whole Foods' owner. The big question is whether Amazon sees the future of groceries as online delivery, shopping in store or a hybrid. At the very least, Whole Foods provides Amazon nationwide locations to test its ideas for the future of grocery shopping. 

Ripe For Growth
Amazon controls a small percentage of the highly-fragmented grocery market
Source: Cowen & Co., Company Reports, Supermarket News

No matter what Amazon plans, it's safe to say that the boring U.S. grocery business is about to become much more interesting. America has been a fairly conventional grocery market. The United Kingdom, for example, is far ahead of the U.S. in the availability of grocery delivery services, and German discount supermarket chains have introduced interesting ideas and cut-rate prices both at home and elsewhere in Europe. (Shares of grocery chains in the U.S. and Europe fell on the news of Amazon's Whole Foods deal.) 

Now that Amazon is dead serious about supermarkets, the U.S. grocery market is in for a major shake-up. Bezos doesn't abide by the conventional rules of business like ... turning a profit. He will slash prices and bleed money for years in groceries if that's what it takes to fuel his strategic mission to become a big player. That will be good for food shoppers but very bad for traditional grocery chains. Welcome to the new world, America. Jeff Bezos is here to break grocery shopping as we know it. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net