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 Jet.com, 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.