Amazon To Buy Whole Foods: Here’s Why That Matters

Amazon is taking a bet that you might also like high-end groceries.  

The online retail giant announced Friday it would purchase the upscale organic grocer Whole Foods for $13.7 billion.

The acquisition of Whole Foods, one of the largest organic grocery chains in the U.S. with $16 billion of annual sales in 2016, by the one of the world’s largest retailers, is sure to shake up the supermarket industry.

Industry analysts say Amazon is making the purchase defensively against bricks and mortar retailer Walmart

Amazon said the purchase would be a cash deal, which means it intends to buy Whole Foods outright. Another option might have been for it to exchange stock, which tends to complicate ownership.

Amazon testing grocery sales

Amazon, owned by billionaire entrepreneur Jeff Bezos, is something of an online octopus, with tentacles in numerous industries including online retail, electronic commerce, cloud computing, media, and through its Prime service, entertainment.

It’s been pushing into sales at traditional stores in recent years, including via a soon-to-launch line of convenience stores and through online grocery deliveries, which allow pick-ups in some physical stores. (As a side note, Bezos used his personal fortune to buy the Washington Post for $250 million in 2013.)

In recent months, Amazon has started testing a grocery service called AmazonFresh, which allows its Prime customers to order groceries online and to schedule home deliveries. It’s also experimenting with a pick up service at select grocers in Seattle.

Disrupting retail

Industry analysts say Amazon is making the purchase defensively against bricks and mortar retailer Walmart, which has also pushed into the organic grocery business in recent years, although with mixed results. Walmart is the largest retailer in the world, with annual sales close to half a trillion dollars.

Profit margins in the grocery business are notoriously thin, which means it can be hard for companies in the industry to make a profit. Quite often, they succeed on volume of sales, which means a high frequency of sales at lower prices. In Whole Foods’s case, it has succeeded by selling at a higher price point.

This spring, activist hedge fund investor Jana Partners purchased nearly 9% of Whole Foods to try to induce a sale.

Deal details

• Whole Foods chief executive John Mackey will continue to lead the company he founded in 1980.
• This is reportedly Amazon’s biggest acquisition to date, beating its 2009 purchase of online shoe retailer Zappos and streaming video service Twitch in 2014, for nearly $1 billion each.
• Amazon’s stock has been trading at a record high, near $1,000 a share. By contrast, Whole Foods’ stock hasn’t been performing as well over the last two years. By end of day Thursday, Whole Foods stock closed at $33 a share, about 50% lower than its share price in late 2013. News of the deal, however, sent the stock of both companies up in early trading Friday, for an increase of 27% for Whole Foods and 3% for Amazon.
• Whole Foods will continue to operate under its own name, and company headquarters will remain in Austin, Texas.