Amazon, the world’s most powerful online retailer, has taken a giant stride into traditional retailing, spending $13.7bn (£10.7bn) to take over organic food chain Whole Foods Market.
The all-cash deal could be game-changing for the traditional supermarket business. Amazon has long had ambitions to move into the grocery business and launched its food delivery service, Fresh, in the US 10 years ago. It introduced the service in the UK last year after signing a wholesale deal with British supermarket Morrisons.
Amazon is the fourth biggest business in the US and accounts for 43% of online sales there. Whole Foods, founded in 1980, has about 460 stores, including nine in the UK where it has operated since 2004.
Supermarket share prices in the US and Europe went into reverse after news of the deal, while Amazon’s stock rose 3.5%, taking it close to $1,000 a share. The online retailer’s founder and chief executive, Jeff Bezos, is close to overtaking Bill Gates as the richest person in the world.
Walmart’s shares dived 6%, wiping about $13bn off the value of the world’s biggest retailer as the deal ramped up pressure on traditional chains already hit by a rapid change in shopping habits. Shares in the UK’s biggest chain, Tesco, and Germany’s Metro were also down about 6% each.
“This deal is potentially terrifying for other grocers,” said Neil Saunders from retail analysis firm GlobalData. “Although Amazon has been a looming threat to the grocery industry, the shadow it has cast has been pale and distant. Today that changed: Amazon has moved squarely onto the turf of traditional supermarkets and poses a much more significant threat.”
Until now, Amazon has had a limited impact on the grocery market. In the US, it still only accounts for less than 0.5% of grocery spending, according to GlobalData.
It only began experimenting with its first bricks and mortar food store in its hometown of Seattle in December last year. Buying Whole Foods will give it a trusted brand and an established network of stores where a basket of goods can be efficiently picked and packed for home delivery in a range of new cities. It will also give shoppers the option of picking up goods ordered online.
Bryan Roberts, an analyst at TCC Global, said the deal with Whole Foods suggested that Amazon could now look to buy supermarket chains in its major markets which include the UK, France and Germany. He said: “This is planting a huge flag that Amazon is incredibly serious about become a significant grocer.”
Analysts at Bernstein suggested Morrisons and Sainsbury’s were possible targets in the UK alongside Ahold Delhaize in the Netherlands and France’s Carrefour.
But Roberts said Amazon already operated partnerships with a number of regional supermarkets in the US as well as Morrisons in the UK and would not necessarily need to buy them out in order to expand. He said the deal was likely to be focused on acquiring access to Whole Foods’ brands, supply chain and distribution network to power the growth of its Amazon Fresh delivery service.
Some analysts expressed surprise at the tie-up between Amazon, which has traditionally focused on cut-price deals, and the upmarket Whole Foods, which is nicknamed Whole Paycheck in the US. Roberts said the two firms’ customer bases were likely to overlap substantially.
Bezos said: “Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy. Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.”
John Mackey, the Whole Foods co-founder and chief executive, said: “This partnership presents an opportunity to maximise value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers.”
Mackey will remain as chief executive and Whole Foods’ headquarters will stay in Austin, Texas.
Mackey’s 0.03% stake in the business, which is listed on the Nasdaq stock market in the US, is worth just over $41m. He is likely to retain a stake in the business.
Whole Foods has had a huge influence on food retail in the US, bringing organic and health foods to the mainstream. But recently growth has stalled.
In February, it announced it would close nine stores in the US after six quarters of decling sales in a row.
The deal with Amazon comes days after Mackey attacked the hedge fund Jana Partners, which had acquired a 9% stake in the retailer. He described Jana as “greedy bastards” that would have to “knock Daddy out” if it wanted to take over the company.
Mackey said the business had changed because “the more conventional, mainstream supermarkets have upped their game”. He added: “The world is very different today than it was five years ago.”
Amazon’s move into the grocery market will pile on the pressure for traditional supermarkets around the world which have been affected by shoppers switching to online, smaller local stores and discounters such as Aldi and Lidl.
Lidl is opening its first stores in the US this week as part of a plan to open about 100 by the middle of next year, while Aldi is in the middle of a $3bn-plus expansion plan to take its total number of US stores to 2,000 by the end of next year. In the UK, the traditional big four supermarkets – Tesco, Sainsbury’s, Asda and Morrisons – have all lost market share in recent years to the rapidly expanding German chains.
Clive Black, a retail analyst at Shore Capital, said: “Amazon is clearly getting into offline as well as online. It is not going to spend nearly $14bn and then close nearly 500 stores. This is going to cause an awful stir in the US and some of those waves will lap into the UK and beyond.”
A good fit? How they measure up
Amazon
Roots Founded by Jeff Bezos in his Seattle garage in 1994. After spending a year building a website and sourcing stock, Amazon opens its virtual doors the following summer, billing itself as the “Earth’s biggest book store” with 1m books to choose from.
Value $477bn
Annual sales $142.6bn
Profits $2.6bn
Employs 341,400
Head office Seattle
Blue sky thinking Bezos is pouring his billions into his private spaceflight company, Blue Origin, developing rockets capable of shuttling the paying public into space.
Whole Foods
Roots College dropout John Mackey and his then girlfriend, Renee Lawson, scrape together $45,000 to open a natural foods store in Austin, Texas, in 1978. In 1980 they join forces with like-minded entrepreneurs Craig Weller and Mark Skiles to open the first Whole Foods Market.
Value $13.7bn
Annual sales $15.9bn
Profits $402m
Employs 60,000
Head office Austin, Texas
Blue sky thinking Mackey wrote Conscious Capitalism, which espouses a business philosophy that is good for suppliers, staff and communities as well as shareholders. A long-term vegan, he more recently co-wrote The Whole Foods Diet, which promotes the health benefits of veganism.
