A $13.7 billion purchase opens new terrain for retailing's
online giant, in the grocery aisles
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 would make 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 were up more than 2% to $987.71
at the close, near 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, or $13.7 billion
including debt. The deal is expected to close in the second half of
this year.
Mutual-fund giant Neuberger Berman, which owns some 2.7% of
Whole Foods, and activist hedge fund Jana Partners LLC, with
roughly 8.2%, had been pressing the retailer to add directors
experienced in retail operations, technology, finance and real
estate, and to consider a sale.
Neuberger portfolio manager Charles Kantor said Amazon's bid
could be topped by grocery companies worried about new competition.
"It's not a big check," he said in an interview. "I would be very
surprised if this is the final chapter of Whole Foods."
Acquiring Whole Foods is strategic for Amazon, a way 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 delivery of
online food orders.
Analysts said they expect Amazon eventually to use the stores to
promote private-label products, integrate and grow its
artificial-intelligence-powered Echo speakers, boost Prime
membership and entice more customers into the fold.
Online grocery shopping is logistically complex, often requiring
fast delivery of cold items as part of large orders on 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 Amazon has to combine two distinct corporate cultures and
leverage its full-scale entry into bricks-and-mortar retailing.
Largely a hands-off manager of smaller acquisitions like
Zappos.com, Amazon is likely to take a more active role in Whole
Foods, Macquarie analyst Ben Schachter said.
Whole Foods has come under fire as traditional grocers offer
more natural and organic items, which are Whole Foods' mainstay.
Its shares had lost nearly half their value since a 2013 peak, and
sales at stores open at least a year had slumped.
At first, the two retailers don't seem like an immediate match.
Amazon is a low-price leader, while Whole Foods is a premium
offering. Whole Foods' operating margins, at 5.5%, are higher than
those of Amazon's North American retail business at 3%, Citi
analysts note. The combined companies would be the fifth-largest
U.S. grocery retailer by market share, according to an analysis by
Cowen, behind Wal-Mart, Kroger, Costco and Albertsons/Safeway.
John Mackey will remain chief executive of Whole Foods; stores
will operate under that name and maintain their suppliers, Amazon
said in a press release. Amazon Chief Executive Jeff Bezos said the
company is "doing an amazing job and we want that to continue."
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 17, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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