Amazon Could Upend The Grocery Market With Whole Foods Deal

by Trefis Team
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Amazon (NASDAQ:AMZN) has agreed to acquire grocery chain Whole Foods for $13.4 billion, which represents a premium of over 25% to Whole Foods’ stock price prior to the announcement. In doing so, Amazon has affirmed its commitment to shaking up the grocery space, and we believe that the company has the potential to dominate the market over the long run. Investors seem to agree – shares of grocery chain Kroger were down 12% in trading following the announcement, while retail giants Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) saw their stocks decline by 5% and 8%, respectively. Below we discuss the potential implications of the deal for Amazon and the broader grocery space. 

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AmazonFresh Stands To Gain Significantly

Amazon has been interested in groceries for some time now, and has been ramping up its presence in the space with food delivery service AmazonFresh, as well as Amazon Go, an app-based, checkout-free grocery store the company is testing. While it’s possible that the company equips Whole Foods’ stores with Amazon Go’s checkout-free capabilities over the long run, the biggest near-term beneficiary of the deal will likely be AmazonFresh. If and when the deal closes, the service will be able to use Whole Foods’ stores and infrastructure to broaden its distribution network and product offerings. Amazon has also recently introduced AmazonFresh Pickup, which allows customers to select and purchase items online and pick them up in as little as 15 minutes at designated pickup locations. The company could potentially use Whole Foods stores as pickup locations, which could lead to a rapid expansion of AmazonFresh.

Why Whole Foods?

Whole Foods has had relatively lackluster performances in recent quarters, with consistent declines in same store sales. This provided somewhat of an opportunity for Amazon in terms of the acquisition price, but that was certainly not the only reason it chose to pursue Whole Foods over other competing grocery chains. Whole Foods’ stores are largely located in cities and relatively affluent areas, where customers may be more likely to utilize AmazonFresh’s offerings. Further, the chain generally charges premium prices for many of its products, which could provide scope for margin expansion if it is able to leverage Amazon’s logistical expertise and use its scale to gain bargaining power over suppliers. The risk of pricing pressure certainly contributed to the declines in grocery and retail stocks over trading Friday.

This Could Change The Grocery Market

It has been apparent for some time now that Amazon has big plans for the grocery market, and we expect it to drive the next wave of growth for the company. With the acquisition of Whole Foods, not only does Amazon gain access to a strong brand and a network of upscale stores, but the immediate expansion of its distribution network could lead to a rapid expansion of the AmazonFresh delivery service. Competing grocery chains and retailers are likely going to have to scramble to adapt over the long term, as the market could be headed for some big changes.

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