Amazon on collision course with Wal-Mart with Whole Foods deal

Gwen Vasquez
June 19, 2017

Some industry observers say Amazon will find it hard to use Whole Foods to pull away Wal-Mart shoppers because the two stores appeal to different customers.

Then there's Amazon Restaurants service, which now delivers prepared meals in a few cities to the homes of Prime members. Amazon, though its Prime benefits program has created strong loyalty, has a long way to go before it's a default choice in groceries as it often is for books and electronics.

Amazon has been opening a limited number of book shops in some United States cities such as Seattle, New York (one opened in the Time Warner building on Columbus Circle three weeks ago) and two are planned for the San Francisco area this year.

Amazon's purchase of Whole Foods also brings disruption to the $700 billion USA grocery sector, a traditional area of retailing that stands on the precipice of a ferocious price war.

Latham & Watkins corporate partners Adel Aslani-Far and Mark Gerstein are representing Evercore Partners in its role as financial adviser to Whole Foods on its proposed sale to Amazon, while Weil Gotshal & Manges banking partners Morgan Bale and Heather Viets, capital markets partner Faiza Rahman, M&A partner Raymond Gietz and tax partner William Horton are acting for Bank of America/Merrill Lynch and Goldman Sachs, both of which are providing bridge financing for the acquisition of the grocery store chain. "We're playing offense", he said. "That's something that doesn't seem to right to me, actually".

Charlie O'Shea, lead retail analyst at Moody's in NY told the Financial Times, said the deal is a "transformative transaction, not just for food retail, but for retail in general".

Sometimes nicknamed "Whole Paycheck" by laypersons unwilling to pay $93 for truffles, Whole Foods has been struggling to compete with competitors like Costco.

While the supermarket revenue growth is expected to continue at 2.2% up to 2022, IBISWorld analysts say ever since the introduction of Aldi to the Australian market, the entire sector is trying to get ahead on price alone, even though "supply chain prices have little room left to move".

Amazon, known for its competitive prices, is trying to attract more low- and middle-income shoppers with its grocery push. Walmart, which has the largest share of the USA grocery market, is ramping up its grocery services as a way to fuel online sales.

In September 2016, the company announced Amazon Wind Farm Texas, its largest wind farm to date - a new 253 MW wind farm that will generate 1 million MWh of wind energy annually.

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It had been planning to build a trial grocery shop/fulfilment centre that would allow consumers to use the store in real time (and like the book shops, be cashless).

Amazon used aggressive pricing to become an e-commerce retail juggernaut and has recently been experimenting with brick-and-mortar outlets.

"That (Whole Foods 365) may become a big problem for Wal-Mart", Grant said. She's skeptical that groceries will go purely online and thinks it'll be more of a hybrid model, where people use a mix of online ordering, restaurants and traditional grocery stores. "People don't know what they're having for dinner when they leave the office at the end of the day and don't have it in the refrigerator".

Grocery has been a somewhat challenging market to navigate online-only, given the high cost of delivery and then there's the issue of customers wanting to be home when grocery items are delivered, so that perishables aren't destroyed.

Shoppers have plenty of options.

Sullivan & Cromwell and Wachtell Lipton Rosen & Katz are among a clutch of firms advising on Amazon's $13.7bn (£10.7bn) purchase of Whole Foods Market, as the online retail giant moves into the grocery business and physical stores.

Shares of dozens of supermarkets, food producers, payment processors and shopping malls collectively lost at least $35 billion in US market value on Friday as the news reverberated across financial markets.

And shoppers are a picky bunch, saying they would be looking for the best prices, good quality and convenience when it comes to online food delivery. Whole Foods will keep operating stores under its name. It would expand Amazon's more existential quest to compete with Walmart on price and selection.

"It would absolutely have to come down until it's included in a Prime membership", Anderson said.

But in a sign that investors believe a rival bid is likely, Whole Foods shares rose above the offer price to close at $42.68.

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