Why Amazon wants to own Whole Foods and sell you groceries

For $13.7 billion, the world's largest online retailer is gaining 460 upscale grocery locations. The retail world will never be the same.

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Amazon is getting into the grocery business in very big way, though with a less Amazonian approach than expected.

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Amazon's grocery ambitions just got a big boost.

Josh Miller/CNET

The online retail giant, which has toiled for over a decade trying to make online grocery deliveries work, said Friday it has agreed to acquire Whole Foods Market for $13.7 billion in cash. The deal, expected to close in the second half of the year, is by far Amazon's biggest acquisition.

The addition of Whole Foods would radically transform the Seattle e-retailer in a handful of ways. Most notably, the world's largest online retailer will now become a major player in physical stores for the first time, after it's dabbled with several store concepts for the past year and a half.

Whole Foods also provides Amazon with a new upscale brand, after the e-commerce company has made its name as a low-cost competitor. Additionally, Amazon is finally making good on heated speculation that it would break into the $800 billion US grocery market.

However, Amazon and Whole Foods have so far said they won't make big changes to Whole Foods, so don't expect a bunch of Amazon technologies or sharply lower prices to pop up at the grocer's locations anytime soon.

By acquiring the grocery chain, known for its high-end, health-first approach to food, the online retailer will get 460 stores in the US, Canada and the UK.

"It's huge," Patricia Orsini, an eMarketer analyst focused on groceries and e-commerce, said of the deal. "It gives Amazon what it did not have to remain dominant in the grocery e-commerce space."

For now, Amazon said it would allow Whole Foods to continue operating as its own business, with John Mackey remaining as CEO and the headquarters staying in Austin, Texas.

A person familiar with Amazon's planning said the e-commerce company has no current plans to change its own groceries strategy either and won't be sunsetting the AmazonFresh grocery brand. It's also too soon to say whether Whole Foods will eventually become part of Amazon's online grocery delivery operations, the person added.

There are also no current plans for layoffs at Whole Foods stemming from the deal, the person said.

"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," Amazon CEO Jeff Bezos said in a press release

Why Amazon wants to grow in groceries

The deal is something of an admission by Amazon that it has so far failed to shake up the grocery market the same way it did traditional retail. With heated competition in the market, Amazon likely needed to make a change, and fast. The benefits of growing in grocery include a huge market worth $800 billion annually in the US and predictable, repeat customers.

The company started its AmazonFresh grocery delivery service more than 10 years ago, but it's been atypically slow to expand the business. Amazon, over the past year, announced two experimental store concepts in Seattle: Amazon Go, a cashier-less convenience store still in development, and AmazonFresh Pickup, grocery pickup locations. It also delivers some perishable and frozen foods through its rapid-delivery service Prime Now.

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A look at AmazonFresh Pickup.

Amazon

Despite those efforts, Amazon and other online retailers haven't been able to convince people to change their grocery shopping habits. US online sales of food and beverages make up a mere 4 percent of the total market, Cowen & Co. reported in March. Folks, it seems, still very much like to pick out their own produce, even if Amazon is willing to bring them groceries to their front door. 

While online grocery is a tiny market, Amazon is a leading player there. The Whole Foods deal should help it stay on top, eMarketer's Orsini said. "In that little space, there's a lot of activity. Walmart is looking to own that space," she added.

The war with Walmart should heat up

Amazon made its first break into stores with an Amazon Books bookstore in Seattle a year and a half ago. The company has since opened seven bookstores, several college pickup locations and mall kiosks. Since that first store opened in Seattle, reporters and analysts have discussed endlessly the potential for Amazon breaking into physical locations, an ironic move because the e-retailer contributed to the demise of Borders, Circuit City, RadioShack and other stores, and because traditional retailers are flagging amid competition against Amazon.

However, many retail industry watchers expected Amazon would have to end up owning stores if it hoped to keep up its huge growth. A major reason for that change: US online sales are still less than 10 percent of the total. Amazon needed stores to draw in the remaining 90 percent. With 460 additional stores, Amazon is finally going big on brick-and-mortar. But it's doing so with an acquisition of an existing retailer, not by building out its own stores, as some predicted.

There is a chance that the Whole Foods stores could eventually become testing grounds for new Amazon store technologies, like cashier-less checkout, but that doesn't seem likely in the short term.

"Implications ripple far beyond the food segment, where dominant players like Walmart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks," Moody's retail analyst Charlie O'Shea said in an emailed statement.

The deal is sure to keep up chatter about the growing feud between Walmart and Amazon, with Walmart pushing more aggressively into Amazon's online world with its acquisition of Jet.com for $3.3 billion last year. Amazon's purchase of Whole Foods could be seen as a counterpunch, especially because Walmart is by far the biggest grocer in the US.

Not slowing down on its e-commerce ambitions, Walmart also on Friday unveiled a $310 million cash deal to buy online men's retailer Bonobos. That acquisition follows a string of purchases of other online stores, including Moosejaw, ShoeBuy and ModCloth.

Whole Foods exploded in popularity two decades ago by offering a wide selection of organic and natural foods at a premium price. But the chain in recent years has struggled to stand out as other supermarket chains expanded their own organic and natural food offerings, often at lower prices. In February, the company said it was reducing the number of stores -- the first time since 2008 -- as it cut its forecast for the year.

Whole Foods posted revenue last year of about $16 billion and its shared closed at $33.06 on Thursday. The acquisition price was $42, an 27 percent premium.

Amazon, whose revenue last year was just under $136 billion, saw its shares rise 3 percent to $994.47 in recent trading. Meanwhile, shares of Walmart, Kroger and Target all sank.

First published on June 16 at 6:19 a.m. PT.
Update, 8 and 9:24 a.m. PT:
Adds comments from source and analyst, plus more details.

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