Amazon makes major move into bricks and mortar

AmazonE-commerce giant, Amazon says it will buy Whole Foods Market Inc in a deal valued at about US$13.7 billion (A$18 billion).

The US$42 per share offer represents a premium of 27 per cent to the upmarket grocery chain’s Thursday close.

Whole Foods shares were halted at US$32.77 in premarket trading, while Amazon’s shares were up 0.5 per cent at US$969.

Excluding debt, the deal is valued at US$13.39 billion, based on 318.9 million diluted shares outstanding as of April 9.

The grocer will continue to operate stores under the Whole Foods Market brand, the companies said.

John Mackey will continue as chief executive of Whole Foods, and the company’s headquarters will remain in Austin, Texas.

Amazon and Whole Foods expect to close the deal during the second half of 2017.

Michelle Grant, head of retailing at Euromonitor International, said the deal between Amazon and Whole Foods makes sense but it’s not without its risks.

Amazon has always wanted to become a big player in grocery,” Grant said. “However, there are challenges to selling groceries online, such as inconvenient and expensive delivery. It is also difficult to pick produce.”

Grant said by buying a physical grocery with a customer base similar to its own, Amazon now has the physical presence that is most efficient, and can offer the best customer experience for shopping for groceries.

“It has a lot of opportunity to bring its digital savvy to the physical realm,” she said. “However, Whole Foods has been under pressure for some time as consumers left the retailer for less expensive, yet similar products at other retailers.”

Grant said, however, that Whole Foods may be difficult to turn around.

“The market has become a lot more competitive,” she said. “Amazon is notorious for lowering costs and passing those savings onto consumers. Its investors are very patient with the company. I believe that Amazon will let Whole Foods become more aggressive on price.”

Grant predicted Amazon would likely work with its existing delivery products (AmazonFresh, AmazonFresh Pick Up, PrimeNow) to offer a range of delivery options for minimal pricing, which will put more pressure on grocery retailers to offer these options as well. Another issue is that it could accelerate the sales of online groceries because Amazon may leverage Whole Foods’ relationships with suppliers to sell on the Amazon.com website, which has 300 million customer accounts.

“With a better assortment online, this could also put pressure on competitors who don’t have an online presence,” she said.

Grant said Whole Foods’ competitor, Walmart, may not be under as much pressure as other high end grocers, such as Kroger.

“Walmart has been working to improve all of these aspects of its business,” she said. “It has been aggressive on price, mostly to defend against discounters, like Aldi and Lidl. It is rolling out click and collect throughout its stores. It brought on Marc Lore, an experienced e-commerce leader, to run Walmart.com.  It has prepared for this day.”

She added  Whole Foods and Walmart’s customers are very different. “Whole Foods customers had been happy to shop at other retailers, including Walmart, for similar products at less prices. It’s unlikely that a Walmart  customer will shop at WholeFoods, even if Whole Foods continues to lower its prices.”

Grant said it’s the grocery retailers that are regional and/or in the middle of the market that will suffer the most, but this is not a new trend. “The higher end grocers and low end grocers have done well at the expense of the middle. Market exits and consolidation have been happening and this is likely to speed up.”

Meanwhile Neil Saunders, managing director of GlobalData Retail said the acquisition fulfils the e-commerce giant’s ambition to be a serious player in the grocery market.

“While Amazon could have built up its presence organically, it would have been both costly and time-consuming to bring the business to scale.

“In our view, an online-only operation would also have suffered from perilously low margins and would have damaged Amazon’s profitability as it scaled up. Whole Foods changes that dynamic.”

Saunders said in the long-term, Whole Foods provides Amazon with a well-balanced and nicely distributed physical presence that allows it to offer click-and-collect and other services which are linked to the rest of its business.

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