Amazon to buy Whole Foods
for $13.7 billion, wielding online might in
brick-and-mortar world
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[June 17, 2017]
By Lauren Hirsch and Jeffrey Dastin
(Reuters) - Amazon.com Inc said on Friday
it would buy Whole Foods Market Inc for $13.7 billion, in an embrace of
brick-and-mortar stores that could turn the high-end grocer into a
mass-market merchant and upend the already struggling U.S. retail
industry.
Amazon used aggressive pricing to become an e-commerce retail juggernaut
and has recently been experimenting with brick-and-mortar outlets. It
will take over a natural and organic grocer pioneer with 456 stores, a
mecca for young, high-end shoppers, that has been struggling to rein in
prices and integrate technology.
The deal represents a dramatic turn in strategy for Amazon, which has
offered food delivery through its Fresh service for a decade but has not
made a major dent in the $700 billion grocery market.
“The ramifications for all of retail are seismic – not just retailers
that sell grocery, but for everyone,” Gordon Haskett analyst Chuck Grom
said.
For graphic - Whole Foods at a glance - click: http://tmsnrt.rs/2skJDSv
Shares of dozens of supermarkets, food producers, payment processors and
shopping malls collectively lost at least $35 billion in U.S. market
value on Friday as the news reverberated across financial markets.
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Shares of grocer Kroger Co swooned 9.2 percent, while Wal-Mart Stores
Inc fell 4.7 percent, signaling fears that Amazon could broaden Whole
Foods' product mix and cut prices.
Amazon's shares rose 2.4 percent to $987.71, adding $11 billion to its
market capitalization, which in one sense makes the acquisition nearly
free for Amazon shareholders.
"Supermarkets will now have to contend with not only competition with
each other and non-traditional grocers like Wal-Mart Stores Inc and
Target Corp, but with a retailer like Amazon which has the financial
capacity to price aggressively," said Mickey Chadha, vice president and
senior credit officer at Moody's Investors Service.
Amazon agreed to pay $42 per share in cash for Whole Foods, a 27 percent
premium on the Austin, Texas-based grocer's closing share price on
Thursday.
But in a sign that investors believe a rival bid is likely, Whole Foods
shares rose above the offer price to close at $42.68.
NO VALUE IN STATUS QUO
A former grocery expert at Amazon predicted that the chain, nicknamed
"Whole Paycheck", would add a selection of discounted food and build out
non-grocery areas within stores, particularly for pharmacy and Amazon
devices.
"There’s no value in Amazon keeping the status quo at Whole Foods. Whole
Foods was losing market share to Kroger," said Brittain Ladd, who until
earlier this year was a senior manager working to roll out AmazonFresh
globally.
"It’s pharmacy. It’s having the ability to put stores that are similar
to Apple stores inside Whole Foods," he said.
Amazon has been looking at shop layouts that could allow traditional
in-store purchase, online ordering with on-site pickup, and home
delivery, using store warehouse space as a distribution point, Ladd
said.
Despite Amazon's reputation for harnessing technology, a prototype store
inside its corporate office in Seattle, called Amazon Go, which uses
sensors and tech-savvy cameras to detect shoppers' selections and then
charge their Amazon accounts, has rolled out more slowly than planned, a
person familiar with the matter said.
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![](../images/061717pics/busine71.jpg)
Customers leave the Whole Foods Market in Boulder, Colorado May 10,
2017. REUTERS/Rick Wilking
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And while some analysts expect Amazon to bring vast buying power to Whole Foods,
Amazon's heft in the food market is far smaller than in other areas, and high
demand for organic products gives farmers unusual bargaining power.
Amazon spokesman Drew Herdener said plans do not include reducing jobs as the
result of the deal and that the company does not plan to automate Whole Foods
cashiers jobs with Amazon Go technology.
WHOLE FOODS WAS UNDER PRESSURE
The deal unfolded after Jeff Bezos, Amazon's chief executive officer, approached
Whole Foods CEO John Mackey about a month ago and received an eager response
from Mackey, two people familiar with the matter said.
The grocer will continue to operate stores under the Whole Foods Market brand,
and Mackey will remain CEO, the companies said.
Whole Foods has posted seven straight quarterly sales declines at established
stores and recently overhauled its board of directors in the face of pressure
from activist hedge fund Jana Partners LLC.
Jana, which disclosed an 8.3 percent stake in Whole Foods in April and is the
company's second biggest shareholder, stands to make roughly $300 million from
the sale to Amazon.
The deal is for $13.4 billion in cash and the remainder in debt. The acquisition
price implies a trailing 12-month price-to-earnings multiple for Whole Foods of
31 times, versus a 14.4 average for the S&P 500 Food Retail index.
Amazon and Whole Foods expect to close the deal during the second half of 2017.
EYES ON GROCERY SHOPPERS
Amazon, started in Seattle in 1994 by Bezos, a former hedge fund manager, has
grown into the world's biggest diversified online retailer, with a market
capitalization of nearly $500 billion. It has expanded from a book seller into a
merchant of nearly all consumer products, as well as producing videos.
Both Amazon and Whole Foods cater to younger consumers including millennials as
well as the affluent.
"Amazon could bring technology to all Whole Foods locations, or it could absorb
Whole Foods into AmazonFresh. Either way, it's good for consumers like myself,"
said Di Wu, a New York resident in her early 30s who is a member of Amazon's
Prime fast-shipping club and who shops at Whole Foods at least twice a week.
![](http://archives.lincolndailynews.com/2017/Jun/17/images/ads/current/christian_village_sda_031616.png)
"Amazon is known to drive down prices and make the shopping experience more
efficient," Wu said.
Goldman Sachs Group Inc advised Amazon on the deal and provided bridge
financing. Bank of America Corp also provided financing to Amazon, while
Evercore Partners Inc advised Whole Foods.
(Reporting by Lauren Hirsch in New York and Jeffrey Dastin in San Francisco;
Additional reporting by Anya George Tharakan in Bangalore, Angela Moon in New
York, Lisa Baertlein in Los Angeles, Noel Randewich in San Francisco, Richa
Naidu in Chicago; Writing by Peter Henderson and Greg Roumeliotis; Editing by
Leslie Adler and Sam Holmes)
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