Amazon to Buy Whole Foods for $13.7 Billion

Big bet on the grocery business

June 16, 2017

Amazon agreed to acquire Whole Foods in a deal valued at $13.7 billion.

The acquisition highlights the rapid pace of change in the grocery sector, where evolving consumer tastes have created challenges for traditional chains, and ecommerce is still in its infancy.

For Amazon, the purchase is an aggressive acceleration of its experimentation in the grocery sector. It has a number of experimental grocery store formats in the works, including a no-checkout, mobile optimized outlet in Seattle. Other experiments combine online ordering with pickup, eliminating the delivery option—one of the most costly aspects of online grocery shopping.

In a single step, the acquisition of Whole Foods gives Amazon a fresh food logistical network, complementing its market-leading distribution network of general-purpose warehouses and delivery services.

"This gives Amazon a sort of playground to experiment with a host of innovations," said eMarketer analyst Patricia Orsini. "Whole Foods stores are often located in more upscale areas, with shoppers that may be more open to innovations and would be willing to be part of testing new ways to shop, to use mobile technology that will allow less friction in the checkout process." 

Over the past year, Amazon has watched competitors develop viable ecommerce models for groceries. Walmart in particular has made big moves, first by buying, and then by using Jet’s expertise in ecommerce to jumpstart its stalled online activities. Walmart already accounts for nearly a quarter of the grocery market in the US. In the past six months, it’s making online access to this much easier by introducing curbside pickup, ship-to-store for online goods, and employee delivery of online orders.

"Whole Foods is a good target for Amazon because it serves a wealthier demographic than Walmart," said eMarketer analyst Yory Wurmser. "It has a great reputation for quality, but a sketchy reputation for price. Whole Foods also has worked with companies like Instacart, giving Amazon more experience in rapid online grocery fulfillment than it had gained with Amazon Fresh. Lastly, Whole Foods has an extensive history in prepared foods, which is likely to be a big part of future online growth as well."

Cowen & Co. sees healthy growth for online groceries over the coming years, but says that as of this year digital sales of food and beverages will make up just 4% of the total in the US. Digital grocery sales will reach $71 billion in 2017, it estimates—a healthy sum, but there are individual grocery companies whose sales top that number.

However, digital grocery buying seems extremely likely to grow, as consumers become accustomed to shopping for more and more products online, and as retailers develop new options for pickup and delivery. While online grocery buying may not make up a significant portion of the overall business just yet, a fair number of consumers have already tried it. Data from Market Track suggests that one in five grocery buyers have made a digital purchase. 

Amazon and Whole Foods provided little detail about the deal, other than to say that Whole Foods will continue to operate under that name, and that co-founder John Mackey will remain as CEO.

Whole Foods pioneered the organic and natural food category, but rivals recognized the advantage and ultimately made gains on it.

Thanks in part to Whole Foods, healthy and organic foods are now widely available. Retailers from Walmart and Target to Kroger and Costco are competing for consumers who want healthier food options. Meanwhile, Trader Joe’s and Sprouts Farmers Market are also eating into Whole Foods’s lunch with their own organic and natural food focus.

Nearly half, or 47%, of Whole Foods’s stores, for instance, are within three miles of a Kroger and more than half of them are within 5 miles, according to a recent report by Barclays. In fact, Kroger sold $16 billion in natural and organic products in fiscal 2016, more than Whole Foods’s sales of $15.8 billion the last 12 months, the report showed.

"The Amazon and Whole Foods deal illustrates the continued importance of the physical store," said eMarketer analyst Krista Garcia. "Since the Webvan days, online grocery has historically been a tough nut to crack, and Amazon’s foray has been no exception. Despite lots of experiments and pilot programs over the years, AmazonFresh in its current iteration has been slow to take hold. Whole Foods will give Amazon greater distribution and potentially open up multi-channel capabilities. This move is definitely a signal to the industry—not just grocers but all retail—that Amazon is even a bigger threat than it already was."