Grocers facing a united Amazon-Whole Foods must adapt

Robyn Ryan
June 20, 2017

Amazon announced on Friday that it was offering to pay $13.7 billion in cash for Whole Foods - a deal that values the chain of organic grocery stores at $42 a share.

Ocado shares rocketed by nearly 7% on Monday as Amazon's swoop on U.S. grocer Whole Foods raised the prospect of a supply deal between the two online retailers.

If shares remain above the acquisition price on the open market, it is very likely that shareholders at Whole Foods will reject the deal. There has been plenty of speculation that if Amazon really wanted to make a presence in the grocery space, it would need to do something major in the brick-and-mortar space. Those stores solve much of Amazon's "last mile" delivery challenge for fresh groceries. Mackey was assured that Whole Foods' quality standards wouldn't be compromised, he said. Whole Foods is also among its partners, though the fate of their five-year contract may now be up in the air.

Jefferies' Brian Fitzgerald provides some more in-depth analysis of the strategy behind the deal: We believe the WFM (Hold) acquisition would give a boost to AMZN's efforts with Fresh which was launched 10 years ago and operates in 20 metro areas in the United States and overseas.

That kind of cashier-less technology could help Amazon reduce its headcount as well, as Bloomberg cites an insider who says the company will be looking to cut staff to help save money on labor costs.

Amazon stock closed the latest trading session on Friday at $987.71 after a 2.44 percent gain compared to the previous close.

"The possible effects on Whole Foods alone are interesting to contemplate", said Maute, a nationally known expert on private label products.

Citi's analyst Brian Raymond said that "Whole Foods provides Amazon with a (primarily leased) 460 retail store footprint across 42 USA states, serving as distribution points and pick-up locations". "My guess is that Whole Foods will become a launching pad for Fresh".

It's a great way for Amazon to integrate into the $800B grocery business, and people's daily shopping habits.

Amazon's surprise acquisition of Whole Foods comes at a time when Amazon has been inserting itself into the grocery market, and Whole Foods had been cutting prices. Short reasons that this theoretically means that such a company could pay more for Whole Foods than Amazon could.

"The first thing Amazon is going to do in this acquisition is to remove all those third-party vendor services", he said. Our organic candy has been in Whole Foods nationally since 2012 and it is online at Amazon.com. "This competitive pressure is due to proposition, geography and audience overlap with Whole Foods and Amazon". At the margin, if this move makes the current U.S. branded food players more likely to sell out to Kraft-Heinz, or catalyzes a reduction in stock prices that makes Kraft-Heinz more willing to engage with them, then this could be a good signal for Kraft-Heinz's acquisition prospects overall. They've tried AmazonFresh, Amazon Prime Pantry, and a bunch of other initiatives to get customers to order groceries online, but it's been slow going.

"As barriers to entry across the space collapse, and as competition heats up from smaller brands and now increasingly from both brick and mortar and online retailers, their lack of exposure to more attractive markets overseas is likely to leave them up the creek without a paddle relative to other CPG sectors like HPP, beverages, European food names and tobacco companies".

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