Amazon to buy Whole Foods for U.S. $13.7 billion

Gladys Abbott
June 19, 2017

"Just because you're a grocery retailer that's been successful in Europe, it's not a given that you're going to be successful in the USA, as exhibited by Tesco", Mulpuru said. None other than John Mackey, Whole Foods chief executive officer, once predicted that Amazon's quest for grocery deliveries would be "Amazon's Waterloo".

"Investors, analysts, competitors and suppliers are left guessing what Amazon may do", Binder, the Jefferies analyst, said.

One analyst from Barclay believes the bidding for Whole Foods (NASDAQ: WMF) may not be over.

But clearly, Amazon was intrigued by the idea, especially given its superior supply-chain management expertise to deliver goods, and its ability to disrupt the business sectors that it enters. Whether consumers will benefit economically and socially is an open question that will not be answered for several years.

"It is not clear how a physical store base of only nine units in the United Kingdom will help Whole Foods in the short-term to catapault Amazon Fresh up the Online grocery rankings, so the negative stockmarket reaction to the news on Friday looks a bit overdone, even if in the long-term the writing is on the wall", pointed out retail analyst Nick Bubb.

Inc said on Friday it would buy Whole Foods Market Inc for $13.7 billion, in an embrace of brick-and-mortar stores that could turn the high-end grocer into a mass-market merchant and upend the already struggling US retail industry. The company is still at the forefront of an ongoing megatrend, and its share of the online commerce market is only getting bigger. Also, it may be seeing the last mile as a real prohibition to profitability in multi-temperature goods. Analysts believe Lidl's entry in the USA market - coupled with Aldi's growth - has the potential to shake things up even further and cause more headaches for grocers as the price war continues to weigh on profit margins. "Having said that, there is probably no doubt that a material new ingredient has been thrown into the global grocery sector M&A melting pot". Target and Walmart suffered similar losses, while Costco saw its stock price sink 7 percent and Supervalu's shares spiraled down over 14 percent. "From a credit perspective, Amazon has over $2 billion cash and investments, and leverage of under 2x at the most recent quarter end, so significant amounts of financial flexibility are clearly evident". The leadership of the business remains in place and it is likely to continue focusing on executing its turnaround strategy.

The Whole Foods deal could also get more people to try grocery delivery, something many shoppers have been hesitant about because of concerns about meat and produce quality.

"Why does Amazon buy Wholefoods?" Stores are ideally located for that.

The company also has been testing sensors at a convenience store in Seattle to track items as shoppers put them into baskets or return them to the shelf. Developing PL is time consuming. Only the latter argument can be levelled credibly at Amazon.

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"I've heard that Amazon's culture is really cutthroat". Within our coverage, Ahold Delhaize (AD) is the most affected. Factor in the Amazon-Whole Foods combo and the HHI score of the e-grocery business rises just 50 points to 3,121. "It remains to be seen what companies might prove interesting for Amazon but we note that WFM has a clear presence in one market and has a high-end positioning".

Although non-edible items have traditionally been Amazon's specialty, it is not a complete stranger to groceries. The probable answer can be determined by rounding up a few of Amazon's prior pursuits, and it not only awe-inspiring but has legitimately huge ramifications for the future of the entire retail industry. Revenue at Instacart, which Whole Foods will have to distance itself from, is up 900% in the past two years.

"Another interesting consideration is the upmarket positioning of Whole Foods".

The acquisition could pose a bigger threat to Target, which has been building smaller stores in cities like NY to attract the affluent urban shoppers coveted by Whole Foods and Amazon, said Kurt Jetta, chief executive officer of TABS Analytics, a consumer products research firm.

Amazon's strong record of keeping prices low adds pressure on supermarket chains that may be forced to consolidate to cut costs in a bid to keep up.

There's not really an alternative in online retail. It started offering monthly payment plans past year, and it announced plans to offer discounts for customers on government assistance earlier this month.

A vehicle passes in front of a Whole Foods Market Inc. location in Willowbrook, Illinois, U.S., on Friday, June 16, 2017.

Amazon.com, Inc. (NASDAQ:AMZN) did something that caught many market analysts by surprise. "We expect this transaction to further accelerate the consolidation within the supermarket space".

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