Here's why Amazon is buying Whole Foods

Share

Whole Foods Market will still run physical stores under its own brand so the deal seems more about bringing Amazon's scale and expertise - especially in analytics - to bare.

But in February, Whole Foods said it no longer saw the potential for expanding its flagship chain to 1,200 locations, up from about 460 in the United States, Canada and the United Kingdom. Investors are likely anxious that Amazon, once entrenched in the physical grocery store business, will ruthlessly cut prices for food products like it did with books.

Grocery shopping - you either love it or hate it. She shops at Whole Foods for organic food and nitrate-free deli counter products and also visits farmers markets to buy fruits and vegetables.

Whole Foods, founded in 1978, saw its stock peak in 2013 at $65.24. "They're greedy bastards, and they're putting a bunch of propaganda out there, trying to destroy my reputation and the reputation of Whole Foods, because it's in their self-interest to do so".

Groceries are already a fiercely competitive business, with low-priced rivals like Aldi putting pressure on traditional supermarket chains and another discounter, Lidl, opening its first USA stores just this week. Amazon shareholders even sent the stock up 3%, meaning the rise in the company's market cap equaled the amount it will spend to acquire Whole Foods. Shares of other grocery-selling chains like Kroger, Target, Sprouts Farmers and Costco experienced a dip after the announcement. "We are seeing very early signs here across AMZN Bookstores and the Amazon Go store in Seattle", Anmuth wrote in a note obtained by CNBC.

"Amazon's been signaling for about one or two years that they're going to make big bets, because they can, because they've got the cash flow to do it, so that makes this less of a surprise", said Mahaney, an analyst at RBC Capital. The company reshuffled its board and appointed a new chief financial officer in May after reporting the seventh-straight quarter of falling same-store sales, a key indicator of retail performance. The deal on the surface seems valuable for stakeholders in both companies. The acquisition price implies a trailing 12-month price-to-earnings multiple for Whole Foods of 31 times, versus a 14.4 average for the S&P 500 Food Retail index. "This is a logistics business, Amazon does logistics, and it's kind of a natural pivot for the company".

More news: Trump Lawyer Contradicts Trump Tweet, Stumps Sunday Beltway Hosts
More news: Michelle Carter, Who Texted Her Boyfriend To Kill Himself, Is Found Guilty
More news: Stan Wawrinka: 'Hopefully Djokovic can find his tennis soon!'

It's unclear what Amazon will do with Whole Foods stores as they will remain under the Whole Foods brand and under Mackey's guidance, but Amazon will likely use them to expedite delivery and as a testing ground for any number of tech and customer-focused experiments. Whole Foods shares were up just over 27% to the $US42.00 per share acquisition price. According to the source, Whole Foods reaffirmed its partnership with Instacart on Friday.

The deal proves Amazon's increasing interest in moving into operating traditional brick-and-mortar stores and its growing focus on groceries.

Amazon could also get a better picture of customers by marrying data from Amazon and Whole Foods' loyalty programs.

"My guess is that the play here is going to be the home delivery that's going to be accelerated by Amazon, not only groceries but prepared meals as well", Mahaney said.

Shares of dozens of supermarkets, food producers, payment processors and shopping malls collectively lost at least $35 billion in USA market value on Friday as the news reverberated across financial markets.

Share