The Whole Foods Acquisition

In a deal that’s shaking the shopping experience for consumers, retailers, and food and beverage companies, Amazon’s announced $13.7 billion bid for Whole Foods has hardened talk of large-scale disruption in the way consumers buy their groceries.

Following the announcement of the all-cash transaction – priced at $42 per share – stock prices of other food retailers turned sharply negative, as did many of the conventionally focused, publicly traded food companies that have long supplied them.

The deal is the largest U.S. grocery transaction since a $17.4 billion takeover of Albertsons by Cerberus Capital Management, CVS Health Corp and SuperValu in 2006, according to Mergermarket.

“To me, the most important aspect of this deal is that this continues to validate that organic and free from foods are the most important food industry trends,” Errol Schweizer, the former global grocery buyer for Whole Foods, said. “Amazon is really betting on that these trends are the future. Organic is growing at close to double digits, it’s a $47 billion market. Free-from and additive free and non-GMO are huge market trends as well. So what Amazon is saying here is ‘we’re taking a bet on the future of food and Whole Foods really represents that.'”

The acquisition ties together to highly influential CEOs, Whole Foods’ John Mackey and Amazon’s Jeff Bezos. The deal appears to have allowed the embattled Mackey to remain CEO in the face of investor pressure that has lasted for more than a year. Whole Foods’ brick and mortar stores will remain open, and the company’s headquarters will remain in Austin, Texas, according to the announcement.

Meanwhile, the purchase means that Bezos has moved his company much more solidly into the brick-and-mortar grocery space, allowing the online marketplace operator to integrate its rapidly expanding business with Whole Foods’ offerings to further change the grocery business. Amazon’s hunger for a strong presence in grocery manifested in its first year of billion-dollar sales of groceries last year. The entire grocery channel is embracing an e-commerce model: a much cited survey predicted that about 20 percent of grocery sales will take place online by 2025.

Amazon’s moves in food and beverage sales haven’t just been via e-commerce, thanks to its recent launches of delivery services, online pick up stores and even cashier-less brick-and-mortar locations.

“Amazon has been exploring physical retail, enabled with cutting-edge technology,” Steve Matthesen, President and CEO at national grocery broker Acosta, noted. “Rather than building out that network, they now have an established network with a high degree of shared customer overlap between Whole Foods’ core and [Amazon] Prime’s core. Retrofitting stores after testing the technology will be faster than a large-scale de novo investment…. This deal also changes Amazon’s approach when it comes to e-commerce, as the store network provides a strong base for click-and-collect and attacks a stronghold for Instacart’s delivery business.”


The deal arrives as both companies were faced with their own crossroads: Whole Foods has seen some of its share of organic, natural and cutting-edge offerings move into more conventional accounts like Kroger and Costco in recent years, battering its revenue growth and share price. Amazon, meanwhile, has been competing with both online grocery platforms as well as physical retailers like Wal-Mart as it tries to get into the food business.

Murmurs of a potential sale of Whole Foods have been floated repeatedly over the past year, especially as the natural retailer faced immense pressure from Jana Partners’ hedge fund and money management firm Neuberger Berman. The investors criticized Whole Foods for its poor performance and lack of focus on money-making sectors, suggesting the chain could be merged with another grocer – much to Whole Foods CEO Mackey’s dismay. In a recent interview with Texas Monthly, Mackey called the activist shareholders “greedy bastards” who were “trying to destroy my reputation and the reputation of Whole Foods, because it’s in their self-interest to do so.”

In response to shareholder pressure, Whole Foods recently overhauled its board. It also made a series of changes to its business, including cutting internal costs by another $300 million, increasing targeted promotions and lowering prices. Operationally, the company announced an expedited rollout of both a loyalty program and an improved category management system to allow for purchases in larger quantities to create better pricing and lower retail costs without sacrificing margin.

Amazon’s entry into the grocery business built gradually. The e-commerce giant planted its first stake into the food and beverage world in 2005 with the launch of Amazon Prime. It then rolled out services like Amazon Dash, Fresh, and Go. Still, it was missing a big piece of the $800 billion grocery market.

Amazon has continuing to tinker, most recently launching two Fresh Pickup locations in Seattle in the hopes that customers would like the convenience of placing orders online and picking them up from a drive-in location. In 2016, Amazon crossed the $1 billion grocery threshold. That growth is continuing in 2017. In its first quarter, Amazon saw $350 million in grocery sales.

But Amazon’s success in grocery has been slower than that of its other categories. “Unlike the other businesses where Amazon has really won in – like books and electronics – where they’ve gotten into the business and effectively obviated the need for retail, with grocery…they’ve realized they can’t,” Arif Fazal, founder and managing director of Blueberry Ventures, said.

One problem that Amazon and its competitors in the ecommerce space have faced is that the inclination of many consumers to pick out their own produce, meat, and dairy has kept them from becoming “full basket” retailers.That’s something that the Whole Foods acquisition will likely solve, according to Keith Anderson, a strategist with e-commerce consultant Profitero.

“Fifty-seven percent of Whole Foods’ sales are in perishables,” Anderson said. “So this significantly upgrades Amazon’s ability to source fresh products, which is an area where they’ve struggled.”


Experts believe that as a member of the Amazon family, Whole Foods will provide the most impact in the short term by giving a boost to Prime Now and Fresh. Prime Now delivers items to Amazon consumers in under two hours by sourcing from both third-party suppliers and Amazon’s own warehouses, whereas Amazon Fresh is a grocery delivery service.

“What Amazon does well, Whole Foods does not. And what Whole Foods does well, Amazon either doesn’t do or hasn’t had success with,” Schweizer said. “The tech side of amazon with data aggregation and consumer insights, competitive pricing strategy, is really unparalleled. And that’s stuff that Whole Foods has a lot of problems with. And likewise, Whole Foods has a very strong perishable supply chain and does really well on the perimeter with meat, seafood and have a great legacy there. And both companies have done a lot for small companies.”

As a real estate play, the deal also potentially gives Amazon about 500 new instant fulfillment centers, where consumers can pick up groceries they have pre-ordered. Experts were split on the potential for Amazon to also use the stores as depots for the retrieval of a broader set of Amazon products.

The Whole Foods acquisition could also have great influence on Amazon’s recently tested cashier-less grocery store concept in Seattle, Amazon Go. Amazon Go was very successful in its first store, Anderson noted. He suggested that kind of “click and collect” technology might quickly move into Whole Foods stores – both those that are already built and also in its growing cohort of smaller footprint 365 stores, which Whole Foods has been touting as being capable of battling lower-priced competitors like Trader Joe’s. Shortly after the deal, however, Whole Foods slowed its plans for more 365 stores, although that may be a deal point.

“Amazon Go technology might be a match made in heaven for 365,” Anderson said.

There may even be potential for Amazon to grow its businesses outside of the grocery sector with this deal. In 2011, Amazon rolled out lockers so consumers could list a shipping location other than their home. Today, there are now over 1,800 lockers in more than 50 cities, and potentially growing if ever implemented in Whole Foods locations.

“Someone in brick and mortar was going to have to figure out the future strategy for ecommerce [for whole foods] and how to deal with ecommerce and more importantly, how to marry ecommerce to brick and mortar. And you couldn’t be better than [Amazon]… these guys get it,” said natural foods retailing consultant Tim Sperry.

There are still other questions surrounding whether Amazon’s Alexa will be a new presence within Whole Foods. The personalized, voice-automated technology has already begun infiltrating Amazon’s grocery business with the company’s newest release: the Dash Wand. It’s a digital “kitchen assistant,” as well as an AmazonFresh ordering device.

The deal is also going to create waves for Instacart, another third-party fulfillment service that offers fast delivery from other retailers. Whole Foods is already an Instacart investor; the deal may bring a buyout due to that company’s competition with Amazon or it may put in a route to purchase, depending on both of those logistics companies’ appetites and also subject to regulatory approval.

In the past, Amazon has also kept acquired assets as captured technologies, locking out some competitors who might have wanted to use it. Such was the case with Kiva, a warehouse logistics program the company acquired in 2012 for $775 million. Instacart currently licenses its services to is used by a large number of grocery chains, including Whole Foods, Albertson’s, Publix and Costco as a way of offering both pickup and delivery of grocery products.


Health-Ade Kombucha CEO Daina Trout said she was excited for the merger, and said she sees it leading to an improved e-commerce delivery system for fresh products. Health-Ade has national distribution with Whole Foods, but has yet been able to fully leverage the e-commerce market due to difficulties in shipping a fresh product in glass bottles. A case of Health-Ade can cost $100 to ship cross country, she said.

“I don’t know exactly what it means for my brand yet,” Trout said. “One of the biggest challenges for Amazon has been fresh food. It’s been difficult, but they’re going to try it again…. With the force of Whole Foods and Amazon combined, I kind of love it.”

Brands that are eager to sell through the combined strength of both retailers should find they’re looking at their best consumers, notes Arnold Ventura, the vice president of business development at fast-growing beverage company Califia.

“When I’ve looked at the demographics of both entities, they show that the core consumer overlaps so nicely. Both consumer bases have so much in common. There’s a lot of synergy from a target consumer standpoint,” Ventura said.

Under the partnership, suppliers may also be able to keep prices down for consumers because they will benefit from Amazon’s efficiency in the distribution system, notes Sperry. One area where rebel investors have attacked Whole Foods is due to its reliance on UNFI as its primary distributor.

“The distribution side is expensive to manufacturers,” Sperry said. “So if I, as a manufacturer, can get my product onto the shelf in a less expensive manner so that the retailer can then sell it for less money, that’s a win.”

“As good as distributor as someone like UNFI is, Amazon knows how to manage the movement of inventory in their system way better then just about anybody in the country with the exception of Walmart,” he added.

Undermining UNFI has the potential to hurt other retailers in the long haul because, if it’s weakened, the wholesaler might become less efficient and more costly. UNFI and Whole Foods are bound under contract until 2025, Sperry said, but that could change under new corporate parentage.

“Down the road, that would have really bad implications on smaller, independents and chains,” Sperry said. “Because their distributor suddenly lost a big chunk of volume… that can have ripple effects through the market. And that’s the scary piece. Because we all want as many of these retailers as possible to continue and be successful.”

But if they are to succeed, Amit Pandhi, the CEO of ice cream maker Arctic Zero, noted that they’re doing it based on the foundational shift that made Whole Foods vulnerable to a takeover in the first place.

“Natural and organic is now conventional,” Pandhi said. “It’s what’s growing in this space, it’s what consumers are demanding. Whole Foods is no longer the number one seller of natural and organic with Kroger and Costco selling more of those other goods. Whole Foods is mainstream and this is a mainstream play.”