Amazon.com, Inc. announced that it is acquiring Whole Foods Market in a deal valued at $13.7 billion that analysts say promises to shake up the grocery store industry. Analysts at RBC Capital and Cowen, while not effectively downgrading the warehouse-club giant, did single out Costco as a potential casualty in Amazon's big push into physical retail of groceries.
Overall, the transaction is the second-largest USA grocery deal on record after Cerberus Capital Management, CVS Health Corp and SuperValue bought out Albertsons in 2006 for $17.4 billion. The upscale grocery chain recently replaced much of its board, added a new CFO and developed plans to slash costs and tweak operations.
Amazon has been testing waters with innovations such as drive-in-grocery delivery service (AmazonFresh Pickup - order groceries online and collect them from a store nearby) and "cashier-less" stores (Amazon Go - the company's first brick-and mortar grocery store). The space has gotten intensely competitive for Wal-Mart, and with Amazon's focus on technology to provide convenience to consumers, Wal-Mart will need to stay on its toes to maintain its market share.
Lately, Whole Foods has been battling its worst sales slump since its IPO in 1997, resulting in pressure this spring from activist hedge fund Jana Partners, which Whole Foods CEO John Mackey accused last week of being "greedy bastards." You point out that 24 percent of millennials bought something from Whole Foods past year. Yet the more I look at it and the more I consider the ramifications the more I think the idea could be the saviour of Whole Foods and the leapfrog Amazon needs in gaining access to a market previously untapped.
Whole Foods, often derided as "Whole Paycheck" for its high prices, could see its reputation change if Amazon, a master at undercutting its brick-and-mortar rivals, passes any savings from automation to customers. This will help Whole Foods have an online delivery presence.
"Overall, this announcement simply serves to underline our bearish view of heavily-processed packaged food names in the US". Now he has his eye on the grocery business - and the way you get your produce may never be the same. In the past two years, it has leased 20 Boeing 767 air cargo jets from Atlas Air Worldwide Holdings, won shipping licenses that allows it to pay for containers at wholesale rates and rent them out for more expensive retail rates, and added thousands of long-haul trucks emblazoned with the Amazon logo. According to insiders, about 10% of Instacart's business now comes from Whole Foods orders, but that seems likely to change.
Whole Foods will eventually be part of Amazon CEO Jeff Bezos's empire.
Amazon had looked at Whole Foods past year but initially decided not to make an offer. "And right now Amazon just took a $14 billion shortcut, so all the retailers out there, they're probably looking for shortcuts for themselves".
The move is a clear indication that Amazon is thinking several years down the road.
"This is an quake rattling through the grocery sector as well as the retail world", said Mark Hamrick with Bankrate.com.
Amazon, like Wal-Mart, is known for using massive scale to offer low prices on everything from shoes and shirts to electronics and books.
Food delivery has failed before, so why does Amazon think it might work now?