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Amazon to Buy Whole Foods in $13.4 Billion Deal Amazon to Buy Whole Foods for $13.4 Billion
(about 9 hours later)
Amazon said on Friday that it had agreed to buy the upscale grocery chain Whole Foods for $13.4 billion, as the online retailer looks to conquer new territory in the supermarket aisle. Amazon agreed to buy the upscale grocery chain Whole Foods for $13.4 billion, in a deal that will instantly transform the company that pioneered online shopping into a merchant with physical outposts in hundreds of neighborhoods across the country.
For Amazon, the deal marks an ambitious push into the mammoth grocery business, an industry that in the United States accounts for around $700 to $800 billion in annual sales. Amazon is also amplifying the competition with Walmart, which has been struggling to play catch-up to the online juggernaut. The acquisition, announced Friday, is a reflection of both the sheer magnitude of the grocery business — about $800 billion in annual spending in the United States — and a desire to turn Amazon into a more frequent shopping habit by becoming a bigger player in food and beverages. After almost a decade selling groceries online, Amazon has failed to make a major dent on its own as consumers have shown a stubborn urge to buy items like fruits, vegetables and meat in person.
For Whole Foods, the deal represents a chance to fend off pressure from activist investors frustrated by a sluggish stock price. Whole Foods last month unveiled a sweeping overhaul of its board, replacing five directors, naming a new chairwoman and bringing in a new chief financial officer. It also laid out plans to improve operations and cut costs. Buying Whole Foods also represents a major escalation in the company’s long-running battle with Walmart, the largest grocery retailer in the United States, which has been struggling to play catch-up in internet shopping. On Friday, Walmart announced a $310 million deal to acquire the internet apparel retailer Bonobos and last year it agreed to pay $3.3 billion for Jet.com and put Jet’s chief executive, Marc Lore, in charge of Walmart’s overall e-commerce business.
With Amazon, Whole Foods gets a deep-pocketed owner with significant technological expertise and a willingness to invest aggressively in a quest for dominance. “Make no mistake, Walmart under no circumstances can lose the grocery wars to Amazon,” said Brittain Ladd, a strategy and supply chain consultant who formerly worked with Amazon on its grocery business. “If Walmart loses the grocery battle to Amazon, they have no chance of ever dethroning Amazon as the largest e-commerce player in the world.”
Amazon has designs on expanding beyond online retail into physical stores. The company is slowly building a fleet of outlets, and much attention has been focused on its supermaket dreams. It has already made an initial push through AmazonFresh, its grocery delivery service. The idea of Amazon, a company founded 23 years ago on the premise of shopping from the comfort of a computer screen, moving forcefully into the crowded field of brick-and-mortar retail, with its limitations on selection and lack of customer reviews, once seemed ludicrous. But in the past several years, the company has dabbled with stores, opening or planning more than a dozen bookstores around the country.
The e-commerce giant has been testing a variety of other retail concepts. It has opened a convenience store that does not need cashiers, and has explored another grocery store concept that could serve walk-in customers and act as a hub for home deliveries. In Seattle, it recently opened two grocery drive-through stores where customers can pick up online orders, along with a convenience store called Amazon Go that uses sensors and software to let shoppers sail through the exits without visiting a cashier.
Under the terms of the proposed deal, Amazon would pay $42 a share for Whole Foods, a 27 percent premium to Thursday’s closing price. After the deal was announced, shares of Amazon rose as much as 3.3 percent while other major retailers, including Target, Walmart and Costco Wholesale fell sharply. The addition of Whole Foods takes Amazon’s physical presence to a new level. The grocery chain includes more than 460 stores in the United States, Canada and Britain with sales of $16 billion in the last fiscal year. Mikey Vu, a partner at the consultancy Bain & Company who is focused on retail, said, “They’re going to be within an hour or 30 minutes of as many people as possible.”
Whole Foods, which was founded in 1978 in Austin, Tex., is best known for its organic foods. The company built its brand on healthy eating and staked its reputation on fresh, local produce, albeit with a high price tag. Founded in 1978 in Austin, Tex., Whole Foods is best known for its organic foods, building its brand on healthy eating and fresh, local produce and meats. It has also long been caricatured as “Whole Paycheck” for the high prices it charges for groceries. That conflicts with a core tenet of Amazon, which has made low prices part of its mission as a retailer.
But the company has increasingly faced fierce competition from rival supermarkets. National retailers like Costco, Safeway and Walmart have begun offering organic produce and kitchen staples, forcing Whole Foods to slash prices. Analysts speculated that Amazon could use its $99-a-year Prime membership service, which gives customers free, two-day shipping and other benefits, to offer Whole Foods customers a better price on groceries, as it does for books in its bookstores. The stores could also serve as an advertisement to get more customers to sign up for Prime; in September the financial firm Cowen & Company estimated that Prime had 49 million subscribers in the United States, representing about 44 percent of households.
Whole Foods has been feeling the heat to bolster its stock for more than a year. Amazon has been on a multiyear offensive to open warehouses closer to customers so it can deliver orders in as little as two hours, and Whole Foods stores will further narrow Amazon’s physical proximity to its shoppers. The stores could become locations for returning online orders of all kinds. Amazon could also use them to cut delivery times for online orders.
John Mackey, a founder, took over as sole chief executive last year, in a bid to revive the company. Money managers, unhappy with the pace of the turnaround effort, have pushed for more, taking aim at the board, its grocery offerings and its pricey real estate holdings. The $13.4 billion deal, which does not include net debt, immediately raised questions about whether Amazon’s experiments with automation, like the cashier-less checkout technology it is testing in its Amazon Go store, could eventually lead to job losses at Whole Foods stores.
The activist hedge fund Jana Partners raised the pressure in April, announcing that it had become the second-biggest shareholder in Whole Foods. Almost immediately, the stock spiked. “Amazon’s brutal vision for retail is one where automation replaces good jobs,” Marc Perrone, president of the United Food and Commercial Workers International Union, said in a statement. “That is the reality today at Amazon, and it will no doubt become the reality at Whole Foods.”
In a defensive posture, Whole Foods, a few weeks later, revamped its board and replaced its chief financial officer. Gabrielle Sulzberger, a private equity executive, was named the company’s chairwoman. Ms. Sulzberger is married to Arthur O. Sulzberger Jr., the chairman and publisher of The New York Times. Drew Herdener, a spokesman for Amazon, said it has no plans to use the Amazon Go technology to automate the jobs of cashiers at Whole Foods and no job reductions are planned as a result of the deal. Whole Foods workers are not unionized.
For Amazon, the deal represents both a major pivot into bricks-and-mortar stores and one of the largest categories of retailing — groceries — that it has just barely made a dent in through its online efforts. The move to buy Whole Foods is a further sign of the outsize ambitions of Jeff Bezos, Amazon’s chief executive and founder, who came under fire from Donald J. Trump during the presidential campaign last year, when Mr. Trump said Mr. Bezos had a “huge antitrust problem because he’s controlling so much.”
The company has increasingly experimented with physical stores, opening a small chain of book stores across the country. In Seattle, it recently opened two drive-through grocery pickup locations for customers who order their items online. Nicole Navas Oxman, a spokeswoman for the Justice Department, declined to comment about whether its antitrust division saw any issues with the proposed acquisition. Law professors who specialize in antitrust said it was unlikely regulators would block the deal.
But those efforts are nothing compared to the number and size of stores they will acquire through the Whole Foods deal. The grocery chain encompasses more than 460 stores in the United States, Canada and Britain with sales of $16 billion in the last fiscal year. “One question would be, does an online seller of groceries compete with a brick-and-mortar grocery store, and I think the answer is ‘yes, at some level, but that overlap is probably not terribly great,’” said John E. Lopatka, a professor of antitrust law at Penn State University.
“The Whole Foods acquisition provides them more physical locations,” said Mikey Vu, a partner at the consultancy Bain & Company who is focused on retail. “They’re going to be within an hour or 30 minutes of as many people as possible.” If the deal goes through, Amazon and Whole Foods will still only account for about 3.5 percent of grocery spending in the United States, making it the country’s fifth largest grocery retailer, according to estimates by John Blackledge, an analyst at Cowen & Company.
The deal immediately raised questions about how Amazon planned to use technology to update Whole Foods stores. Groceries are purchased five times a month on average by shoppers, compared with the four times a month Amazon Prime customers typically shop on the site and two times for people who do not have Prime memberships, Cowen estimates.
In one of the internet retailer’s more notable bricks-and-mortar experiments, a convenience store in Seattle called Amazon Go uses a combination of sensors and cameras to automatically keep track of the items shoppers put into their baskets, letting them simply walk out of stores without the need for cashiers. “If you open up groceries, it could increase the frequency,” Mr. Blackledge said.
Amazon has no plans to use the technology it developed for Amazon Go to automate the jobs of cashiers at Whole Foods, said Drew Herdener, a spokesman for Amazon. No job reductions are planned as a result of the deal, he said. For Whole Foods, the deal represents a chance to fend off pressure from activist investors frustrated by a sluggish stock price as it has faced fierce competition from Costco, Safeway and Walmart, which have begun offering organic produce and kitchen staples, forcing Whole Foods to slash prices. Money managers, unhappy with the pace of the turnaround effort, have pushed for more, taking aim at the board, its grocery offerings and its pricey real estate holdings.
In response, Whole Foods has revamped its board and replaced its chief financial officer. Gabrielle Sulzberger, a private equity executive, was named the company’s chairwoman. Ms. Sulzberger is married to Arthur O. Sulzberger Jr., the chairman and publisher of The New York Times.
Investors are betting there may be other buyers interested in Whole Foods, and by late Friday the company’s shares rose above Amazon’s $42 a share offer.
Even with the bigger physical presence Amazon will gain through Whole Foods, it will have far less reach than Walmart and its Sam’s Club warehouse chain, which together account for about 18 percent of the grocery market. Walmart has almost 10 times the number of stores as Whole Foods does.
“We feel great about our position, with more than 4,500 stores around the country and fast growing e-commerce and online grocery businesses,” Greg Hitt, a spokesman for Walmart, said in a statement.