By Laura Stevens and Annie Gasparro
Amazon.com Inc. said on Friday it would buy Whole Foods Market
Inc. for $13.7 billion, including debt, instantly transforming the
online giant into a major player in the bricks-and-mortar retail
sector it has spent years upending.
The acquisition, Amazon's largest by far, gives it a network of
more than 460 stores that could serve as beachheads for in-store
pickup and its distribution network. It makes Amazon an overnight
heavyweight in the all-important grocery business, a major spending
segment in which it has struggled to gain a foothold because
consumers still largely prefer to shop for food in stores.
In its drive to conquer consumer spending, Amazon has ventured
far from its roots as an online book seller. It is developing its
own delivery network, and has become a significant video content
creator and cloud data service provider.
Its Whole Foods deal is a blow to other retailers, notably
Wal-Mart Stores Inc., which derives more than half of its sales
from groceries and is struggling to compete online. Traditional
grocers such as Kroger Co. and Albertsons Cos. have been battling
volatile food prices, lackluster consumer spending and stiffer
competition from deep discounters, online merchants and a plethora
of other places to purchase food.
Retail stocks including Wal-Mart, Target Corp. and Costco
Wholesale Corp. sank. Amazon shares up more than 3% at $996.93 in
recent trading, close to its record high.
"Amazon views grocery as one of the most important long-term
drivers of growth in its retail segment," writes Colin Sebastian, a
Robert W. Baird analyst. The acquisition gives Amazon a scale and
density "that otherwise would have taken years to build out."
The deal came together in the past month, just after Whole Foods
announced an overhaul of its board of directors, according to
people familiar with the deal. The process was influenced by
Amazon's own plans to build out a network that would have competed
against Whole Foods, the people added.
Amazon will pay $42 a share for Whole Foods, valuing the grocer
at a 27% premium to its closing price Thursday. The deal is
expected to close in the second half of this year.
Acquiring Whole Foods is a strategic move for Amazon to quickly
grab a bigger portion of the estimated $674 billion U.S. market for
edible groceries, according to consulting firm Kantar Retail. Until
now, Amazon has largely focused its grocery efforts around its
Amazon Fresh subscription service, which promises quick food
delivery for online orders.
But online grocery shopping is logistically complex, often
requiring fast delivery for cold items as part of large orders on
less-profitable routes, where stops are spread far apart. And many
consumers still prefer to touch, smell and pick out fresh items
like fruits and vegetables for themselves.
Online shopping accounted for 2% of grocery sales last year,
according to Kantar. Before Amazon's announcement, that share was
projected to grow to 3% by 2021. Amazon's food-and-beverage grocery
market share was estimated at 1.1% last year, compared with 1.7%
for Whole Foods, according to Cowen.
Now it's up to Amazon to combine two distinct corporate cultures
and leverage its full-scale entry into bricks-and-mortar retailing.
While Amazon has largely remained a hands-off manager of its
smaller acquisitions like Zappos.com, it is likely to take a more
active role in Whole Foods, according to Macquarie analyst Ben
Schachter.
John Mackey will remain chief executive of Whole Foods and the
stores will continue to operate under that brand and maintain their
suppliers, Amazon said in its release. Jeff Bezos, Amazon's chief
executive, said the company is "doing an amazing job and we want
that to continue."
Still, Whole Foods has been under fire, struggling as
traditional grocers expand the natural and organic offerings that
have been Whole Foods' mainstay. Its share price has lost nearly
half its value since its 2013 peak, as sales at stores open at
least a year have slumped.
Activist hedge fund Jana Partners LLC, the company's
second-largest shareholder with a roughly 8.2% stake, and
mutual-fund giant Neuberger Berman, which owns 2.7% of the stock,
have been pressing Whole Foods to add directors with experience in
retail operations, technology, finance and real estate, and to
consider a sale.
Still, Citi analysts note that Whole Foods' operating margins,
at 5.5%, are higher than Amazon's North American retail business,
at 3%.
At first glance, the two retailers don't seem to be an immediate
match. Amazon is known as a low-price leader, while Whole Foods is
a premium offering. But Whole Foods' network of stores in 42 states
could act as potential hubs for grocery delivery and package
pickups, playing into Amazon's ambition to handle more of its own
logistics and deliveries.
Combining the two companies' market shares in food-and-beverage
and consumables would make it the fifth-largest U.S. grocery
retailer, according to an analysis by Cowen, behind Wal-Mart,
Kroger, Costco and Albertsons/Safeway.
Analysts said they expect Amazon to use its Whole Foods
acquisition to promote private-label products, integrate with and
grow its artificial-intelligence-powered Echo speakers, boost Prime
membership and entice more customers into the fold.
David Benoit and Austen Hufford contributed to this article
Write to Laura Stevens at laura.stevens@wsj.com and Annie
Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
June 16, 2017 15:37 ET (19:37 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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