Amazon's Deal for Whole Foods: What You Need to Know
June 16 2017 - 2:56PM
Dow Jones News
By Austen Hufford
Amazon.com Inc. made a massive push into the grocery space with
its $13.7 billion deal to buy Whole Foods Market Inc. Here are six
takeaways from the deal:
This Isn't Just About Grocery Stores -- It's an Amazon Jump-Off
Point
Soon, Whole Foods locations could be much more than just a place
to buy organic pears. Amazon could be viewing Whole Foods's 11
regional distribution centers and its 440 U.S. stores as a faster
and more convenient way to reach its customers. The deal buttresses
Amazon's famed logistics engine, which already includes more than
70 U.S. fulfillment centers. Soon customers will likely be able to
get faster and fresher food from Amazon along with access to the
vast array of other products Amazon offers. The deal could also
catapult expansion plans for its locker pickup services and
same-day delivery regions.
This Is Amazon's Largest Deal Ever
The deal is Amazon's biggest ever -- by a huge margin -- at more
than 10 times the size of its 2014 purchase of videogame streamer
Twitch Interactive Inc. for $970 million. If it wanted, Amazon has
enough cash and current assets to pay for the deal, but it would
significantly cut into its holdings. As of March, it had $15.44
billion in cash and equivalents and $6.1 billion in marketable
securities. Amazon says it expects to finance the deal with debt
and cash on hand.
Shareholders of Other Grocery Sellers Are Terrified
Shares of grocery competitors fell sharply after the deal was
announced, over worries that the industry, which was already facing
a tough year, would now have to contend with Amazon. Shares of
Wal-Mart Stores Inc. dropped 4.4%, shaving about $12 billion off
the company's market capitalization -- not too far off the entire
amount Amazon is spending to buy Whole Foods. Meanwhile, Kroger Co.
shares fell 12%, Supervalu Inc. shares fell 14%, Target Corp.
shares fell 7% and Costco Wholesale Corp. shares fell 5.8%. Will
Amazon do to grocers what it did to booksellers?
The Deal Is a Big Bet on Retail
Amazon's move shows that its small forays into storefronts and
square feet in recent years were more than just a test. It now has
eight open Amazon bookstores that sell Kindle readers and tablets
in addition to books, two drive-in grocery stores and has been
working to open a cashier-less convenience store.
Grocery Remains Fragmented, at Least for Now
Grocery remains a largely fragmented sector, with the top 10
retailers controlling 45% of the market, according to Cowen Inc.,
and the rest being controlled by grocery chains, convenience
stores, dollar stores and independent sellers. Still, Moody's Vice
President Mickey Chadha expects Amazon and its financial capacity
to price aggressively, hurting smaller regional supermarket chains
and independent operators the most -- and he expects more
consolidation in the industry.
Activists Made a Quick Buck
Activist hedge fund Jana Partners LLC, the company's
second-largest shareholder with a roughly 7% stake, stands to make
around $400 million, a huge return on its investment in only a few
months. Jana took its stake in Whole Foods earlier this year and
had been agitating for a turnaround. According to a filing, Jana
paid about $705.6 million for its stake, or about $26.81 per share.
Amazon agreed to pay $42 per share for Whole Foods.
Write to Austen Hufford at austen.hufford@wsj.com
(END) Dow Jones Newswires
June 16, 2017 14:41 ET (18:41 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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