Amazon Targets Your Fridge With Whole Foods PurchaseBy , , and
Food sales has long been a category where Amazon struggled
Deal will give Amazon physical stores, industry knowledge
For Amazon.com Inc., the blockbuster $13.7 billion deal to buy Whole Foods Market Inc. is a giant step toward dominating every part of a consumer’s shopping experience. Amazon is already in your mailbox, with all of the items you’re purchasing with your Prime membership; your living room, with its Echo device and Prime television services; your library, with its Kindle; and your closet, with Zappos. Now it wants to fill your fridge.
“This is an earthquake rattling through the grocery sector as well as the retail world,” Mark Hamrick, analyst at Bankrate.com, said in an email.
Amazon agreed to pay $42 a share in cash for the organic-food chain, including debt, a roughly 27 percent premium to the stock price at Thursday’s close. John Mackey, Whole Foods’ outspoken co-founder, will continue to run the business -- a victory after a fight with activist investor Jana Partners that threatened to drive him from power.
With the Whole Foods deal, Amazon Chief Executive Officer Jeff Bezos is acknowledging that, after a decade-long foray marked by scattershot experimentation, he couldn’t go it alone in the $800 billion grocery business. The company tried to compete with several offerings: Amazon Fresh, available in 20 cities; Amazon Pantry, which lets consumers buy crackers, paper towels, and other non perishables; and Prime Now, which delivers groceries from local stores in some cities. Its Dash buttons allow easy ordering of household items, and Subscribe & Save gives discounts to customers who commit to regular deliveries of products like tampons, toothpaste or dish soap.
But the many options confused customers, and a major gauntlet remained: Fresh food. Selling produce online is hard. Waste is inherent, and shoppers have long been reluctant to buy a cantaloupe they can’t squeeze.
The Whole Foods purchase gives Amazon hundreds of physical stores, the footprint the company knows it needs. More than that, Whole Foods has mastered fresh food: The company gets two-thirds of its sales from perishables like fruits, vegetables and meats, while most supermarkets get only about 25 percent of sales from those categories, according to Kurt Jetta, CEO of consumer products research firm TABS Analytics. And the Whole Foods deal gives Amazon strong industry knowledge, something it knows it’s lacking, according to a person with knowledge of the matter.
“Amazon clearly wants to be in grocery, clearly believes a physical presence gives them an advantage,” said Michael Pachter, an analyst at Wedbush Securities Inc. “I assume the physical presence gives them the ability to distribute other products more locally. So theoretically you could get 5-minute delivery.”
What Amazon brings is engineering prowess. The company will look for ways to use automation and other technologies to streamline checkout at Whole Foods and sell groceries at lower prices, said the person, who asked not to be identified discussing non-public plans. To do that, it’s considering selling fewer items and integrating tools from the cashierless store Amazon Go into checkout stations across Whole Foods. Amazon also wants fewer employees in each store, with those who remain providing product expertise, rather than performing mundane tasks. The idea is to gravitate away from the "Whole Paycheck" perception for high prices that has dogged Whole Foods, the person said.
Amazon spokesman Drew Herdener said the company has “no plans” to deploy no-checkout technology in Whole Foods locations.
“This will be a good deal for consumers, including those who might not have been doing business with Whole Foods in the past, either because of its positioning in the organic branding space or because prices have been seen as high," Hamrick said. “Amazon can be expected to work to deliver better value to grocery customers, both online and within the brick-and-mortar space.”
Amazon’s talks with Whole Foods began three years ago, when Amazon was developing fast delivery service Prime Now, according to a person familiar with the talks who declined to be identified disclosing private information. Whole Foods was receptive, the person said, but went dark and then announced a deal with Instacart Inc..
The Whole Foods idea resurfaced again in 2016, Bloomberg reported earlier this year, and it took a lot of convincing for the notoriously frugal Bezos to be persuaded to cut a deal this size -- more than ten times bigger than his largest acquisition so far, according to a different person familiar with the matter.
Even so, the announcement sent shockwaves across industries, from payments to retailing. Grocery chains plunged on Friday -- Wal-Mart Stores Inc. fell 4.7 percent, while Kroger Co. tumbled 9.2 percent -- as investors worried that woes will mount in the increasingly cutthroat industry. Payments companies Square Inc., Vantiv Inc., Blackhawk Network Holdings and Verifone Systems Inc. also took hits Friday on concern that the deal will lessen demand for traditional methods of paying for goods at checkout.
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Some of Whole Food’s largest investors think it’s possible that another retailer will come back with a higher bid. Wal-Mart, Target Corp. and Kroger may make offers to push Amazon to spend more, according to Karen Short, an analyst for Barclays.
Amazon and Whole Foods weren’t always seen as obvious partners, but Mackey has been under pressure to find an acquirer after Jana disclosed a more than 8 percent stake and began pushing for a buyout. That prodding irked Mackey, who has referred to Whole Foods as his “baby” and to Jana as “greedy bastards.” By enlisting Amazon, he gets to keep his job as chief executive officer of the grocery chain while giving the stock price a jolt.
Whole Foods shares surged 29 percent to $42.68 in New York, above the agreed-on price, a sign that some investors are indeed speculating that a rival may try to outbid Amazon. Shares of Amazon gained 2.4 percent to $987.71.
S&P said it may cut Amazon’s AA- rating, since Amazon’s leverage will increase as a result of the Whole Foods purchase. If S&P does, it would be the first time Amazon’s rating has been changed by the agency since 2012.
The transaction will have big implications for Instacart, a startup that has delivered grocery orders from Whole Foods stores in more than 20 states and Washington, D.C. Last year, the San Francisco-based company signed a five-year delivery partnership with Whole Foods, according to a person familiar with Instacart’s business who was not authorized to talk publicly about it. The contract remains in place, this person said.
Before the Whole Foods purchase, Amazon’s biggest announced buyout came in 2014, when it agreed to buy video-game service Twitch Interactive Inc. for $970 million in cash, according to data compiled by Bloomberg. The Seattle-based company had about $21.5 billion of cash and equivalents at the end of March, the data show.
“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 Friday’s statement. The takeover is slated to be completed in the second half of the year, with Whole Foods’ headquarters remaining in Austin, Texas.
Goldman Sachs Group Inc. advised Amazon on the deal and Evercore Partners Inc., advised Whole Foods.
— With assistance by Molly Schuetz