Amazon is buying Whole Foods in a stunning move into brick-and-mortar retail that gives it hundreds of stores across the United States — and gives it a laboratory for radical retail experimentation that could revolutionize the way people buy groceries.
The deal, valued at about $13.7 billion, unites the company that persuaded people to go online to buy books — and then everything else — with the upscale grocery store chain that fell behind as shoppers found “good enough” alternatives to the organic and natural foods it helped popularize.
Whole Foods will keep operating stores under its name, with John Mackey staying on as CEO and its headquarters remaining in Austin, Texas.
Amazon already offers grocery-delivery services in five markets. But the Whole Foods purchase will let it expand to many more. Amazon also offers grocery shipments elsewhere, but that’s tough with perishable foods.
The deal — targeted to close in the second half of the year — could be “transformative,” Moody’s lead retail analyst Charlie O’Shea said in a note to investors, “not just for food retail but for retail in general.”
Groceries already are a fiercely competitive business, with low-cost rivals like Aldi and Trader Joe’s offering a growing number of organic options, putting pressure on traditional supermarket chains, and another discounter, Lidl, opening its first U.S. stores just this week on the East Coast.
Whole Foods, which had swallowed up former rivals including Wild Oats, had launched its own offshoot chain named after its “365” private label brand in a nod to the popularity of no-frills chains.
The Amazon-Whole Foods combination could put even more pressure on those chains and other big grocery sellers. Walmart — which has the largest share of the U.S. food market — has been working on lowering prices, while Target has been struggling to turn around its grocery business.
The “implications ripple far beyond the food segment, where dominant players like Walmart, Kroger, Costco and Target now have to look over their shoulders at the Amazon train coming down the tracks,” O’Shea said.
Grocery industry analyst David Livingston, managing partner of DJL Research, said Whole Foods customers shouldn’t expect major changes at the stores, though. Livingston said Amazon will likely want to take advantage of everything from the grocery chain’s culinary expertise to their “prime real estate locations.”
In an email to customers, Whole Foods said it will maintain the same standards under Amazon, including bans on artificial flavors and colors and antibiotics in hens producing its eggs.
Online delivery of groceries so far has been tough for any company to pull off because of customers’ concerns about the quality of meat and produce, Wedbush Securities analyst Michael Pachter said. But if customers know that what they’re getting is the same as what they’d get at the local store, they’d be more likely to try it, Pachter said.
He said that even if Amazon gets 20 million members of its Prime loyalty program to pay $15 a month extra for AmazonFresh grocery-delivery service, that’s $20 million not going to traditional supermarkets. He said that these are likely the higher-income households who tend to buy more expensive brands and cuts of meat.
“The conventional grocery store should feel threatened and incapable of responding,” Pachter said.
And because customers can buy foods and bulk items like toilet paper from a single retailer, discount retailers such as Costco, Target and Walmart should feel threatened, too, he said.
Walmart has been pushing harder into online to build on its strength in its stores and groceries. It announced Friday that it’s buying online men’s clothing retailer Bonobos for $310 million in cash, following a string of online acquisitions including ModCloth and Moosejaw.
Grocery delivery businesses are likely to be affected by Amazon’s purchase of Whole Foods, among them Peapod, long based in Skokie but moving to downtown Chicago. What impact might the move by Amazon have on Peapod? A company spokesman declined to answer that but said the move by Amazon “is another sign that retailers are responding to the various ways consumers shop for food.”
Just two years ago, Whole Foods boss Mackey predicted disaster for Amazon’s foray into grocery delivery, telling Bloomberg BusinessWeek it would be “Amazon’s Waterloo.”
But Whole Foods has seen its sales slump and in February said it no longer saw the potential for expanding its flagship chain to 1,200 locations, up from about 460 in the United States, Canada and the United Kingdom. It also had announced a board shake-up and cost-cutting plan a month ago amid pressure from activist investor Jana Partners.
Meanwhile, Amazon has been expanding its reach in goods, services, entertainment — and groceries. It could have built up its groceries business without acquisitions, said Neil Saunders, managing director of GlobalData Retail, but that would have been costly and time-consuming.
With Whole Foods, Amazon gets an established business that it can transform through its technology and supply network expertise. And it should be able to bring cost-cutting technologies, such as robots to move inventory around, while the company gets a better picture of customers by marrying data from Amazon and Whole Foods’ loyalty programs.
That could help Amazon do better with pricing and promotions, branding and the overall store experience, said Robert Hetu, a retail analyst at Gartner.
Amazon also has been testing automation technology at a Seattle convenience store that’s currently open only to Amazon employees. The store uses sensors to track items as shoppers put them into baskets or return them to the shelf. The shopper’s Amazon account gets automatically charged.
Hetu said Amazon isn’t likely to bring that to Whole Foods right away but could deploy pieces of it to further cut costs.
Both companies said there will be no layoffs but did not respond to other questions about Amazon’s plans for Whole Foods.
Whole Foods, founded in 1978, saw its stock peak in 2013 at $65.24. And the key measure that retailers look at to gauge their health — revenue at stores open more than a year — has fallen for seven quarters in a row.
That’s frustrated investors saddled with a drop of nearly 43 percent from the start of 2014 through Thursday, while the rest of the stock market marched 32 percent higher to record heights.
The investment firm Jana Partners said in April that it had built up an ownership stake in Whole Foods because it saw ways to address its “chronic underperformance for shareholders.” Jana had pushed to shake up Whole Foods’ board of directors, among other changes.
Pressure from activist investors got so high that Mackey told Texas Monthly magazine recently that “they’re greedy bastards, and they’re putting a bunch of propaganda out there, trying to destroy my reputation and the reputation of Whole Foods because it’s in their self-interest to do so.”
Contributing: Stefano Esposito
Amazon’s acquisition of Whole Foods Market was sending the stocks of grocery store operators and other companies that compete with Whole Foods plunging on Friday.
Investors worried that Amazon — which already has won over hordes of shoppers of clothing, electronics and many other kinds of goods, wreaking havoc on department stores and other brick-and-mortar retailers — will do the same thing with groceries.
Here’s a look at some of the big moves happening in the stock market following news of Amazon’s acquisition of Whole Foods Market.
• Amazon — Investors like the deal and think it will be good for the online retail giant, which has been expanding its grocery offerings. Amazon’s stock, which recently traded over $1,000 for the first time, was up $34.15, or 3.5 percent, at $998.56.
THE ACQUISITION TARGET:
• Whole Foods Market — The natural foods retailer helped start a trend toward natural and organic foods, but its stock has struggled in recent years. And recently the company shook up its board and said it would cut costs. The stock peaked at $65.24 in October 2013 and traded as low as $28.53 in March. On Friday, it soared $8.87, or 27 percent, to $41.92, pennies below the $42 a share Amazon agreed to pay.
• Wal-Mart Stores — The giant retailer sank $4.98, or 6 percent, to $73.91.
• Target — The retailer fell $5.55, or 10 percent, to $49.90.
• Costco — The wholesale club company gave up $12.44, or 6.9 percent, $167.64.
• Supervalu — The grocery store operator lost 60 cents, or 16 percent, to $3.16.
• United Natural Foods — The purveyor of natural and organic foods suffered gave back $6.07, or 16 percent, to $33.94.
• Kroger — The grocery store chain declined $3.42, or 13.9 percent, to $21.14.
• Sysco Foods — The food distributor sank $2.46, or 4.4 percent, to $53.07.
• Cal-Maine Foods — The egg producer fell $2.85, or 7.3 percent, to $36.25.
• CVS Health — The drugstore company lost $3.64, or 4.5 percent, to $76.45.
AMAZON, WHOLE FOODS AT A GLANCE
CEO / founder: Jeff Bezos
Annual sales: $136 billion in 2016
Market value: $476 billion
CEO / co-founder: John Mackey
Headquarters: Austin, Texas
Annual sales: $15.7 billion in fiscal 2016
Market value: $13.4 billion
Contributing: Stefano Esposito