Amazon and Whole Foods Market on Friday announced that they have entered into a definitive merger agreement under which Amazon will acquire Whole Foods Market for $42 per share in an all-cash transaction valued at approximately $13.7 billion, including Whole Foods Market’s net debt.
The deal is the largest in Amazon’s history, and that’s notable since the online retail giant has acquired more than 70 companies since it was founded by Jeff Bezos more than two decades ago.
“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Amazon CEO Bezos. “Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades—they’re doing an amazing job, and we want that to continue.”
John Mackey, Whole Foods Market’s co-founder and CEO, added, “This partnership presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers.”
Whole Foods says it will continue to operate stores under the Whole Foods Market brand and “source from trusted vendors and partners around the world.”
Mackey will remain CEO of Whole Foods, and headquarters will stay in Austin, Texas. In fiscal 2016, Whole Foods Market had sales of approximately $16 billion. It operates more than 460 stores in the U.S., Canada and the U.K.
The acquisition will further immerse Amazon in the $611.9 billion supermarket industry, where Whole Foods holds a 2.7 percent market share.
According to IBISWorld industry analyst Madeline Hurley, “Although industry revenue is only set to rise at an annualized rate of 0.8 percent over the five years to 2022, the transaction will allow (Amazon) to boost not only its grocery sales, but expand its brick-and-mortar presence.”
This is not the first time Amazon has dabbled in brick-and-mortar retailing. In 2015 the company opened a physical book store in Seattle and now operates a total of eight locations nationwide. Over the next five years, as the retail sector becomes even more competitive, retail powerhouses like Amazon and Walmart are expected to invest in both online and physical stores in order to maximize their market share, according to IBISWorld.
Completion of the transaction is subject to approval by Whole Foods’ shareholders and regulatory agencies in addition to other customary closing conditions. The parties expect to close the transaction during the second half of 2017.
According to Mergermarket, the transaction represents the second-largest U.S. grocery deal on record. The only one larger is 2006’s $17.4 billion deal for Supervalu, Cerberus Capital Management and others to purchase Albertsons.
Are Millennials the target?
Amazon already is the biggest e-commerce player in America, and it has become so pervasive in retail that 42 percent of consumers bought something from Amazon last year, according to The NPD Group. Looking further, a full 60 percent of Millennials are Amazon buyers.
By contrast, just 20 percent of American consumers bought at least one item from Whole Foods last year, and that’s down 3 percentage points from the prior 12 months. But, among Millennials, the number is substantially higher: 24 percent. That’s extraordinary penetration for a supermarket chain with just 431 U.S. stores, The NPD Group reports.
The proposed deal gives Amazon control of those 431 stores, nearly all of which are in neighborhoods that are more affluent and younger than America as a whole. Those stores solve much of Amazon’s “last-mile” delivery challenge for fresh groceries—which arguably is the biggest single reason that Amazon has not been able to make a dent in the grocery shopping of the 60 percent of Millennials who already buy other items from Amazon, according to The NPD Group.
Of those who already buy groceries through the web, 52 percent of them are Amazon Prime members, NPD research found. Those 431 stores suddenly make it easier for those Prime members, who tend to purchase heavily through Amazon, to get access to fresh produce/foods.
“Fresh foods are the final frontier for Amazon. And figuring out how to get it to your front door is the ultimate in convenience for consumers. In order for Amazon to get the volume growth they are looking for, fresh foods have to be part of the equation. This deal gives them credibility with consumers and a major foothold in that space,” said David Portalatin, VP of industry analysis-food for NPD.
Some accuse grocer of ‘selling out’
Some Whole Foods shoppers did not take this morning’s news well, accusing the supermarket chain of “selling out” and expressing concern about the quality of products the grocer would sell after the merger.
Whole Foods responded with a letter addressing its customers’ potential concerns:
Dear Valued Shopper,
Today marks the beginning of an exciting new chapter in Whole Foods Market’s history with the announcement that we’ve entered into an agreement to merge with Amazon.
Amazon is an innovative company and we are excited about our partnership. We believe it presents an incredible opportunity to take Whole Foods Market’s mission and purpose to new levels and will create significant value for our stakeholders—including you, our most loyal customers.
We want to assure you that Amazon shares Whole Foods Market’s deep commitment to quality and customer service. We will continue to operate our stores and deliver the highest quality, delicious natural and organic products that you’ve come to love and trust from Whole Foods Market.
No artificial flavors, colors, preservatives, sweeteners or hydrogenated fats will ever be in any of the food we sell. Meat will still come from animals raised with no-added growth hormones, ever. And all eggs in our dairy cases will continue to come from cage-free hens that aren’t given antibiotics. Those standards are core to Whole Foods Market and we will remain committed to them.
Whether you’ve been a Whole Foodie for 30 days or 30 years, you have been an important part of making Whole Foods Market what it is today. We look forward to sharing the next chapter with you.
Your Whole Foods Market Team
What some industry leaders are saying
There’s been no shortage of commentary about the proposed deal since news of it broke. Below is what a few in the industry are saying:
“Amazon’s news to acquire Whole Foods may seem shocking, but they are continuing on a mission to provide seamless customer experiences. We know Amazon has been investing in the grocery space for some time, starting with Prime Now and then moving into AmazonFresh, but they’ve had two roadblocks standing in their way before this move: quality and the cost of organic expansion. In terms of quality, consumers like to touch and feel their produce or know they are buying from a source with the same level of quality standards they have. This deal gives Amazon the seal of approval for the quality products that Whole Foods has earned over decades. In terms of organic expansion, Amazon realizes fresh food warehouse needs do not fall under the warehouse network that Amazon has built. To effectively play in the organic expansion space, Amazon needs a net new buildout of a cold chain in Amazon’s distribution network, and with this acquisition they just bought themselves a distribution network. Additionally, this acquisition will make Amazon a huge omni-channel juggernaut in one swift move, taking them 15 physical stores to well over 400 overnight.”
—Jennifer Sherman, SVP of product and strategy, Kibo
“Yes, Amazon has already mastered same day delivery in a great number of metro areas, but we know that in-store pick up can be more lucrative per transaction due to the impulse buys. This move will accelerate Amazon’s ability to offer additional fulfillment options such as buy online, pick up in-store or same-day delivery—in the grocery space. Our latest research indicates 66 percent consumers expect buy online, pick in-store fulfillment options and 55 percent are willing to switch retailers if this option is not available. Brick and mortar isn’t dead, it’s just disrupted at this point and now that Amazon can sell more product on those same-day purchases (and include Amazon product in Whole Foods stores), the sky is the limit for them.”
—Tushar Patel, CMO, Kibo
“Amazon’s acquisition of Whole Foods goes way beyond just grocery. This is a major wakeup call for all of retail. Amazon now has the last mile licked. The next step will be to use Whole Foods locations as in-store pickup spots. Since 58 percent of shoppers purchase more goods when they do a pickup, this will be a huge business enhancer. What this means for retailers in general is that they need to get their omni-channel strategies in play—FAST. A retailer’s best option is to invest in order management, highlight that they offer click-and-collect services, and provide the best service possible on that in-store drop-in. According to a soon-to-be released report from OrderDynamics, 26 percent of North American retailers offer click-and-collect services online. This means that 74 percent of retailers need to move fast, or plan to be in another business in a few years.”
—Charles Dimov, director of marketing, OrderDynamics
“This changes the game completely for so many grocery retailers and has put Amazon in a perfect position to push the boundaries of the grocery segment. We will quite likely see them continue to push to sell more than just groceries as well as continue to trial more store innovations. One of the most obvious obstacles for Amazon going after the brick-and-mortar grocery market in 2016 was the lack of physical store shelves, which is so critical in grocery. This has changed overnight for Amazon. The purchase of Whole Foods will make the online grocery space even more competitive, which is why it will be so important for grocery retailers to have consistent online and in-store pricing. For grocery retailers to even think about competing with this new juggernaut, the industry must have the ability to control and drive in-store pricing and promotions with speed, agility and consistency.”
—Paul Milner, marketing director, DisplayData
“Amazon’s acquisition of Whole Foods addresses its two greatest weaknesses—a lack of physical stores and a strong grocery play—while potentially creating even greater advantages for its greatest strengths: endless aisles and customer data. Bringing hundreds of physical locations under its control will allow Amazon to understand consumers at a much deeper level, enabling them to personalize the experience, both online and in store, to an unprecedented degree. Accenture claims that Amazon already generates 35 percent of its sales via its recommendation engine, and it will be fascinating to see how they will connect digital and physical data points to create a single customer view to drive more personal and engaging experiences across all channels.”
—David Buckingham, CEO, Ecrebo
“Whole Foods has over 430 stores globally, meaning Amazon has acquired more than 430 new properties to use as distribution centers. Retailers already concerned about Amazon’s strength in digital commerce now need to contend with the reality: Amazon is coming after brick-and-mortar, too. I talk with retailers every day who are in denial of Amazon’s impact on their business. But Amazon understands that retail and distribution have changed forever. It’s no longer about buying and reselling products, but about creating incredibly valuable ecosystems. This news changes everything, and from my perspective there can be no more denying the Amazon effect, and how the company has completely changed retail.”
—Adrien Nussenbaum, U.S. CEO and co-founder, Mirakl
“With this deal, Amazon is making deeper inroads into more consumer homes. The Whole Foods acquisition certainly enables Amazon to service a growing sector of consumers that are taking well-being and health very seriously. At a deeper level, this acquisition also fuels Amazon’s never-ending thirst for hyperlocal data about markets and unique customers. I would be hard-pressed to believe that the grocery industry has been as thorough and precise in using the deep pools of consumer data they have to drive higher customer profitability. Amazon, on the other hand, has continued to invest in AI and machine learning to constantly service their customers with high levels of service, more products and at prices consumers feel are low and fair. This news has the whole grocery industry waking up today with a realization that the playing field just changed dramatically. I doubt other retail sectors that compete with Amazon understand the impact of how now having the large treasure trove of data on customer’s grocery, health and well-being buying is going to enable Amazon to be an even more ruthless competitor in every retail sector, whether it is shoes, baby products, apparel, electronics or any of the other 400 million-plus products it sells.”
—John Squire, CEO, DynamicAction