The deal’s announcement instantly sparked a selloff in the stocks of other major U.S. supermarket and big-box chains on expectations that Amazon would bring its low-price expertise and technology prowess to bear with Whole Foods, putting further downward pressure on prices in the already hyper-competitive, $611-billion U.S. grocery industry.
“This is an earthquake rattling through the grocery sector,” Bankrate.com senior economic analyst Mark Hamrick said in a note to clients.
“We can only imagine the technology innovation that Amazon will bring to the purchasing experience for the consumer,” he said.
Amazon said it agreed to pay $42 a share for Austin, Texas-based Whole Foods, which operates 460 stores in the United States, Canada and Britain, including about 85 in California, its biggest market.
Whole Foods would keep its name under the deal, which is subject to shareholder and regulatory approval and expected to be completed in the second half of this year.
The company also would maintain its Austin headquarters, and John Mackey would remain Whole Foods’ chief executive.
Founded in 1976, Whole Foods was a pioneer in selling natural and organic groceries as consumers increasingly sought more nutritious foods.
But conventional supermarket chains have been catching up by stocking their aisles with more natural products and often at lower prices than those at Whole Foods.
As a result, Whole Foods’ sales growth and stock price had faltered, and activist investors including Jana Partners, had been pressing for a sale or a shakeup of Whole Foods’ board of directors.
Before Friday, Whole Foods’ stock had tumbled more than 40% from its high in 2013. But Amazon’s offer is a 27% premium to Whole Foods’ closing price of $33.06 a share Thursday.
Whole Foods’ relatively lofty prices were seen as particularly onerous for millennials age 18 to 34, and the company has responded by opening smaller, lower-price stores, called 365 by Whole Foods, with six locations in the works in Southern California.
“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” Amazon Chief Executive Jeff Bezos said in a statement. “They’re doing an amazing job and we want that to continue.”
Seattle-based Amazon, along with rivals such as Wal-Mart Stores Inc., also have been trying to build their online grocery businesses but they remain tiny players so far.
Amazon launched its AmazonFresh delivery service in its hometown of Seattle in 2007 and expanded the same-day and early-morning service to Los Angeles in 2013 before tackling other locations nationwide.
“Amazon is innovative and aggressive and certainly has the capital to infuse and do the kind of things that fit with their management model,” said Ron Johnston, who publishes the Shelby Report, which tracks the grocery industry.
The grocery market is a place where Amazon’s competitors, such as Target and Wal-Mart, have historically had a leg up.
That could change, said Paul Cuatrecasas, chief executive of corporate finance advisory firm Aquaa Partners. “This deal should leave no doubt that Amazon is deadly serious about dominating all aspects of retail,” he said.
“It is pivotal because the most effective way for traditional companies to fight off disruption, from the likes of Amazon, has been to depend on their industry expertise and physical footprint, while strategically acquiring tech startups to tool themselves up to compete,” Cuatrecasas said. “This deal has dramatically flipped the table on those traditional companies.”
While Amazon may integrate Whole Foods’ business into its sprawling global logistics operation, it would be unwise for the e-commerce giant to vastly and quickly change the in-store shopping experience, analysts said.
“Everybody’s in the [groceries] game, so I think the worst mistake would be to try and reinvent what obviously has been successful for Whole Foods,” Johnston said.
Matt Conrod, 21, hopes the sale doesn’t result in changes in the goods stocked at the downtown Los Angeles Whole Foods — particularly the vegan doughnuts he favors because of allergies.
“But I wouldn’t mind being able to order my vegan doughnuts online and getting them flown to me by drone if that is an option with Amazon,” he said.
Whole Foods has about 3.2% of the Southern California grocery sector, according to the Shelby Report. Albertsons, which also owns Vons and Pavilions, leads the sector with about 20.6% of the market. Kroger Co., which owns Ralphs and Food 4 Less, is second with 18.7% of the Southern California market.
Amazon has made nearly 80 acquisitions since listing its stock publicly in 1997, according to data from FactSet. Amazon used its newly liquid stock in the late 1990s to buy competitors, including Telebook and Bookpages. Other acquisitions either took Amazon into new areas, as it did in picking up movie-and-TV information provider IMDB, or sought to improve technology, which included getting Livebid.com for an online auction feature.
The company quieted down for several years, before growing increasingly aggressive with dealmaking starting during the Great Recession. Amazon bought audio-books service Audibile company, shoe retailer Zappos and diapers retailer Quidisi. Expansion efforts in recent years have focused on video games and media. Amazon’s biggest deal coming into Friday had been its 2014 acquisition of video streaming service Twitch for just under $1 billion.
In its major acquisitions, Amazon has allowed companies to run independently and maintain their unique cultures. Zappos, known for giving all employees a strong voice in operations, remains in Las Vegas. Twitch has kept its headquarters in San Francisco. Though Amazon recently shut down Quidisi, the hands-off oversight has largely paid off for the company.
Amazon’s dealmaking team, led by senior vice president for business development Jeffrey Blackburn, doesn’t appear to be slowing down. Amazon has showed interest in acquiring workplace chat app Slack in a deal that could value the startup at $9 billion, Bloomberg reported Thursday.