Amazon.com jolted the grocery industry Friday when it announced plans to buy Whole Foods Market, introducing new uncertainty to a sector already struggling to keep up with growing competition.
The $13.7 billion deal heightens a years-long battle between Amazon, the Internet darling, and powerhouse merchants such as Walmart, which recently beefed up its online operations with a $3.3 billion purchase of an Amazon competitor.
Now Seattle-based Amazon â€” which for years has been testing grocery innovations in quiet corners â€” could lay claim to a fleet of more than 460 stores throughout the United States, Canada and Britain.
â€œThis deal should leave no doubt that Amazon is deadly serious about dominating all aspects of retail,â€ said Paul Cuatrecasas, chief executive of Aquaa Partners, a London-based investment banking firm. â€œAmazon is effectively saying that if retailers are going to tool themselves up with technology, then they will tool themselves up with a physical presence and high-street brand.â€
Although Amazon remained tight-lipped Friday about its plans for the natural and organic food giant, a prototype grocery store the company opened this year in Seattle provides clues to its vision for the future: cashier-less shops where purchases are tallied automatically on an app instead of at a checkout counter. Separately, the retailer this week began selling a wand that can read grocery barcodes and order household essentials. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)
News of the deal sent shares of rival grocers plummeting as investors tried to digest the implications of an Amazon-backed grocery chain. SuperValu, with a network of 2,000 stores across the country, took one of the biggest hits, with a 14 percent drop Friday. Kroger, rumored late last year to be considering its own takeover of Whole Foods, was down 9 percent. (Shares of Whole Foods, meanwhile, soared nearly 30 percent; Amazon stock rose more than 2 percent.)
But some analysts say Amazon is likely to face significant challenges as it expands into a notoriously difficult business with low profit margins. Amazon and Whole Foods are very different businesses: One is a technology company that wins over customers with sophisticated algorithms and low prices. The other, nicknamed â€œWhole Paycheck,â€ is known for the premiums it charges for specialty foods and its workplace culture that compensates cashiers and other staffers well. Both are led by hard-charging entrepreneurs who have spent decades turning their companies into iconic, multibillion-dollar businesses.
â€œTo combine a company that specializes in high-end produce and specialty meats with a low-priced provider of everything â€” well, itâ€™s a complete contradiction,â€ said Daniel Morgan, a senior portfolio manager at Synovus Trust, which owns Amazon shares. â€œIf Amazon is going to buy something, why not a margin-booster like another cloud business that will actually bring profits?â€
Morgan drew parallels with other big-name mergers, such as AOLâ€™s $165 billion takeover of Time Warner in 2000, which was also heralded for bringing together dot-com prowess and old-school know-how.
â€œEverybody applauded that deal and said it was the greatest deal ever,â€ Morgan said. â€œAnd then suddenly it didnâ€™t work out â€” the cultures didnâ€™t fit, the business were completely different â€” and people started shaking their heads, saying, â€˜What were they thinking?â€™â€‰â€
â€œAmazon recently began experimenting with bookstores, but this is by far its most ambitious move into physical retail. The company â€” which last year accounted for one-third of U.S. online sales â€” was recently granted a patent for technology that would block shoppers from comparing prices from their mobile devices while they are in stores.
The Whole Foods deal signals a turning point for Amazon, after it struggled for years to break into the $800 billion U.S. grocery business. The companyâ€™s decade-old AmazonFresh delivery service has been slow to take off, accounting for 0.8 percent of all grocery purchases last year. Walmart, by comparison, sold 17.3Â percent of the countryâ€™s groceries, while Kroger sold 8.9 percent, according to Bloomberg data.
Among those once skeptical of Amazonâ€™s move into groceries was Whole Foods co-founder John Mackey, who in 2015 was quoted as saying grocery delivery would be â€œAmazonâ€™s Waterloo.â€
â€œFood is the one thing Amazon hasnâ€™t been able to figure out,â€ said Josh Olson, a technology analyst at Edward Jones. â€œTheyâ€™ve tried out all these different concepts, and the question was always: Would going all-in mean getting into the bricks-and-mortar business?â€
Analysts said Whole Foods stores could be useful in Amazonâ€™s quest to shorten shipping times. The hundreds of stores, clustered around urban areas, could essentially become holding grounds for Amazon products, according to James Bailey, a management professor at George Washington University.
â€œNow they can literally use the Whole Foods stores themselves as distribution centers,â€ he said.
In Whole Foods, Amazon is acquiring a company that has recently come under pressure from investors for its lagging performance. The upscale merchant has found it difficult to attract more mainstream consumers as Walmart and other large chains have stepped up their sales of natural and organic products, and Whole Foods has posted six straight quarters of declining sales at comparable stores.
The U.S. grocery industry, once dominated by a handful of big chains, has been struggling to keep up with new competition. Nearly 20 grocers have filed for bankruptcy in the past three years, as regional chains such as Wegmans and Trader Joeâ€™s expand into new markets and delivery services such as FreshDirect gain popularity. The industry braced for a new threat Thursday, when German discount grocer Lidl opened its first 10 U.S. stores.
Under its deal with Amazon, Whole Foods, founded in 1980, would continue to operate under its existing brand. Mackey would remain chief executive after the purchase, and the company would keep its headquarters in Austin.
â€œThis partnership presents an opportunity to maximize value for Whole Foods Marketâ€™s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers,â€ Mackey said in a statement.
The deal is sure to put new pressure on Walmart, which has been aggressively expanding its online business in hopes of winning over consumers. The Bentonville, Ark.-based retailer announced Friday that it had agreed to buy online clothier Bonobos for $310 million, adding to its roster of recently acquired Internet companies, including Jet.com (purchased for $3.3 billion), ModCloth, Moosejaw and ShoeBuy.com.
The Whole Foods deal is scheduled to close in the second half of 2017, pending shareholder and regulatory approvals. Although President Trump has said that Amazon has a â€œhuge antitrust problem,â€ legal experts said the merger of the two companies is not likely to raise red flags.
â€œGenerally speaking, there is very little overlap between Whole Foods and Amazon,â€ said Michael Carrier, a Rutgers Law School professor who specializes in antitrust issues. â€œTheyâ€™re not really competitors. Add to that the fact that Whole Foods doesnâ€™t have the dominant positioning it did even a few years ago, and that makes it even more likely for this deal to go through.â€
The $42-a-share offer from Amazon is a 27 percent premium over Whole Foods Marketâ€™s closing stock price Thursday.
Amazon, which is sitting on $21.5 billion in cash, has long eschewed big takeovers. Among the companyâ€™s largest acquisitions are its 2009 purchase of online shoe retailer Zappos.com for roughly $1.2 billion and video game streaming site Twitch, which it bought in 2014 for about $1 billion.
â€œWhole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades â€” theyâ€™re doing an amazing job and we want that to continue,â€ Bezos said in a statement.