Amazon to Buy Whole Foods in $13.7 Billion Deal

With its $13.7 billion acquisition of Whole Foods Market, Amazon went from testing the waters with its grocery-retail concept store, Amazon Go, to carving a direct path to becoming a major U.S. grocery retailer. While the e-commerce giant doesn’t need to be the biggest grocer in the country, Amazon is aiming to be among the top grocers in key cities, experts say.

Even though their grocery delivery service, AmazonFresh, was launched a decade ago, brick-and-mortar grocery retail is  a category that Amazon has been carefully working its way into over time. By acquiring Whole Foods, Amazon has bought a well-known grocery brand whose customer base overlaps with Amazon’s shoppers, creating a whole that is greater than the sum of its parts. 

For Amazon, the deal marks an ambitious push into the grocery business, an industry that accounts for $700-$800 billion in annual sales in the U.S. With Amazon, Whole Foods gets an owner with significant technological expertise and a willingness to invest aggressively in the grocery retailer’s success.

“The Whole Foods customer is the Prime customer,” said Cooper Smith, director of Amazon research at L2 Inc., a business intelligence firm., who defines the demographic as “high- earning, young millennials.” Amazon is asking itself how it can “capture as much of their wallet as possible.”

To that end, it’s not Amazon’s goal to necessarily be the top grocer overall in the U.S. Rather, according to Smith, Amazon wants to be among the top five in its core markets, places where these affluent millennials can be found: San Francisco; New York City; Boston; Austin, Texas; and Philadelphia.

This acquisition will have an effect beyond these five geographies, experts say. Major players in the grocery space are now in Amazon’s cross-hairs: including Kroger, which had already closed down nearly 19% in Thursday trading and is down again in Friday trading, Target Co. , which discussed the need to transform its grocery business during its analyst event earlier this year, and Costco Wholesale Corp., which has certain pricing advantages but has yet to fully capitalize on them, according to analysts.

“As other brick and mortar retailers have come to realize the hard way that competing with Amazon is a formidable challenge, supermarkets will now have to contend with not only competition with each other and nontraditional grocers like Walmart and Target, but with a retailer like Amazon which has the financial capacity to price aggressively, and the smaller regional supermarket chains and independents will bear the most pain,” said Moody’s Vice President Mickey Chadha, who expects that there will be additional consolidation in the supermarket sector.

Amazon shares were up more than 3% in Friday trading, while Whole Foods shares have skyrocketed more than 27%. Year to date, Amazon is up 32.5% and Whole Foods is up 36.6%.

Growth through acquisition is often mistakenly considered the exclusive domain of the largest companies. However small and midsize company looking to achieve substantial growth can benefit just as well. For more information about how Talley can help you plan, negotiate, structure and execute on your growth strategy, contact us today.

 

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