Amazon and Whole Foods: 5 things to know about the blockbuster deal
The food retail industry has been flush with big mergers lately, but today’s stunner has no precedent.
The announcement that Amazon plans to buy Whole Foods Market for $13.7 billion heralds the coming together of two retail icons with vastly different cultures — one a mainstay of the brick and mortar world and the other a master of online shopping. It also creates big challenges for competitors in the wider retail landscape, especially those focusing on groceries, beauty and health. The deal is subject to shareholder and regulatory approvals and is expected to close during the second half of 2017. Whole Foods’ CEO John Mackey will remain in his role. Here are five key points about the developments:
1. Marriage of Needs
This combination will serve important purposes for each side. Amazon desperately wants a bigger grocery presence to boost its already growing online grocery sales, and this gives the company a bigger beachhead.
Whole Foods needs the extensive financial resources of a giant like Amazon, especially at a time when it’s under pressure from investors frustrated over a lagging stock performance.
2. Heightened Competition
This deal signals a new level of competition in the retail space. That’s the message of the falling stock prices that immediately followed the announcement, impacting retailers such as Target, Walmart, Kroger, Costco, and Supervalu. The entire retail industry is now on notice that disruption is going to reach new levels, which shouldn’t be surprising any time Amazon gets into the picture. This deal will create new urgencies for competitors to get their e-commerce strategies in shape, from home delivery to click-and-collect.
3. Physical vs. Virtual
The word omnichannel was created for a situation like this. Amazon has been gradually backtracking into the physical stores business, including strategies to open grocery and convenience stores. The acquisition of more than 460 Whole Foods units would be the latest and biggest example of its embrace of physical stores. This will likely enhance Amazon’s ability to speed home deliveries to consumers by leveraging Whole Foods’ physical store base.
The merger announcement said, “Whole Foods Market will continue to operate stores under the Whole Foods Market brand and source from trusted vendors and partners around the world.” That means Whole Foods is being valued for its brand, even as the combination would enable new omnichannel synergies, including the ability to market Whole Foods’ brands through Amazon’s numerous channels.
4. Health, Wellness and Beauty Evolves
Whole Foods has been challenged because mainstream retailers have adopted many of its pioneering wellness strategies. That has pressured Whole Foods to keep moving the needle to differentiate and boost sales. Amazon isn’t uniquely qualified to solve this challenge, but it has a wide range of online distribution outlets and platforms that could help address this problem by making Whole Foods’ natural, organic and better-for-you items more accessible to consumers.
On beauty: Amazon already has a huge impact on beauty, with a wide-ranging online store that includes luxury, skin care and fragrance. Given that it already draws a large beauty audience, the merger provides a new, highly unique beauty product set from Whole Foods to showcase in front of that audience. So while most of this merger is about grocery, beauty also provides an upside.
5. Value Equation
Whole Foods has been long plagued by its “Whole Paycheck” image of being very expensive. After years of trying to offer more in-store values, the retailer opened a new format last year called 365, which is smaller and offers lower prices. Amazon, on the other hand, is the master of value, and its involvement presumably will help bring Whole Foods more in line with consumer price expectations, while hopefully maintaining quality. If Amazon can’t do it, who can?