By Chirag Gandhi
On June 16, 2017, Amazon shocked the market by announcing a USD 13.7 Billion takeover deal for Whole Foods. This represented a low 27 percent premium on the stock price of Whole Foods, as stock market activist investor JANA Partners LLC had criticized management for poor performance and underwhelming earnings. Hence, CEO John Mackey revealed that the “partnership presents an opportunity to maximize value for Whole Foods Market's shareholders, […] bringing the highest quality, experience, convenience and innovation to [their] customers.” Mackey will continue as CEO for the company, which will continue to exist under the Whole Foods banner as the deal was approved by regulators and shareholders on August 23, 2017.
Amazon’s Acquisition Transforms the Market
As major food retailers, such as Sobeys and Metro Inc. struggle to compete against discount stores, Amazon’s (AMZN) acquisition of Whole Foods Market Inc. (WFM), has propelled the grocery food industry towards a major transformation. This acquisition will allow more consumers to shop for their groceries online or at discounted prices in store. CNBC news reports that about 12 percent of American grocery shoppers bought groceries online in 2016. Amazon believes that this acquisition will allow them to be the pioneer of online grocery shopping for millennials.
The End of Brick-and-Mortar Grocery Stores?
Effects of the transformation are already underway as traditional brick-and-mortar grocery stores took a major hit on their stock price as the takeover bid was announced in mid-June. Costco (COST) shares have now tumbled around 17 percent since the deal was announced because experts believe that Amazon’s acquisition will impact industry trends in the long run. Prior to the acquisition, BMO Capital study found that prices shown on Costco’s website were around 17 percent lower than on Amazon.com. Amazon’s acquisition of Whole Foods has significantly lowered the prices of many popular items for Whole Foods customers. Per Bloomberg, the price of whole trade organic bananas went down 30 percent and the price of Gala Apples went down 33 percent after the deal was finalized. These and other price cuts are part of a pricing strategy by Amazon to encourage new customers to shop at Whole Foods. Whole Foods’ infrastructure also makes Amazon more competitive against Costco and Walmart (WMT), since they have stores in 42 US states and were the first grocer to use “chat bot.” Whole Foods “chat bot” technology allows consumers to quickly obtain recipes and product information directly from Facebook messenger. Amazon believes that this technology will significantly increase online spending for groceries by allowing consumers to find products and recipes in a matter of seconds with fast delivery services.
The Bottom Line
Amazon has developed the world’s most efficient order-fulfillment system. Their infrastructure consists of warehouses and shipment centers across the world. They believe that the market is shifting from buying at a physical location to buying from a virtual store that is always accessible. Hence, Amazon has taken advantage of their existing infrastructure and cash surplus to diversify their business and shopping options for their customers. Whole Foods will allow Amazon customers to order fresh, organic foods from the comfort of their homes and have it delivered at incredible speeds. This acquisition is Amazon’s first major attempt at becoming a dominant grocery store, and it is safe to say that this is only the beginning of virtual grocery shopping.