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Why Is Amazon Buying Whole Foods?

Amazon’s recent acquisition of Whole Foods has sent ripples across the markets and grocers alike. The 400 plus store supermarket chain is being bought over for $13.4 billion by the retail giant in a bid to enter the top five spots in the grocery retail sector, according to Cooper Smith, director of Amazon research. While some experts believe the takeover is anything but a fait accompli, there are others who are enthusiastic about the changes Amazon can bring with this coup d’état.

Ripples have been felt across the stock market with the news of Whole Foods takeover. Most grocery stocks have taken a beating following the announcement of Whole Foods acquisition. Predictably, Whole Foods shares have climbed a whopping 30% since the announcement while Amazon shares climbed to 38.8% this year. The impact of the takeover on the credit risk for the food industry is not something to cheer about though. Since the announcement, the one-year probability of default rate went up by 30% according to S&P Global Market Intelligence.

Among other things that plunged include shares of Supervalu that owns Cub Foods, Shop & Save and Kroger. Supervalu saw shares plummeting down to the tune of 14% while it was more than 9% for Kroger. The stock price of 30 million shares of Blue Apron has been slashed to $10 from an $17 as it goes public, thanks to the Amazonian effect. Costco, the warehouse club did not fare well either, with a 7% drop in share prices. The worthy competitor and current market leader, Wal-Mart dropped 5%.

Why is Amazon buying Whole Foods?

The question in everyone’s minds is how Amazon will benefit from Whole Foods takeover. For starters, the online giant can gain a further foothold into the $675 billion grocery business in the US which by no means can be ignored. By entering the physical retail sector, Amazon would be giving Wal-Mart some sleepless nights. Currently, Wal-Mart is the leader with 14% of market share as a retailer and the recent acquisition of jet.com could see further increase in those numbers, but that could change with Amazon expanding its base through Whole Foods.

Experts do not believe the acquisition is going to be a hugely profitable exercise for Amazon, that’s known to operate on thin margins and low pricing. What Whole Foods can do to Amazon, is add value. Through Whole Foods stores, Amazon gets a valuable channel to market hardware including Kindles, Fire TV boxes or others, driven by discounts on Amazon Prime membership. Arguably, the best value adds from Whole Foods is the huge data of new users that Amazon can potentially tap into when customers log in with Prime accounts.

Amazon can also effectively sell online many of the non-perishable canned or dried foods that Whole Foods offers. Amazon has already made inroads into using cutting edge technology in the way shopping is done and experienced. Be it the drone-based delivery, or Amazon Go where there is no need to stand in queues for payments, the most critical drawback in physical retail stores. Store pickup after ordering online with AmazonFresh Pickup is another feather in Amazon’s cap. With Whole Foods as well, the retail giant could be introducing more automation, faster delivery modes and a better shopping experience, all of which customers have come to expect from the e-commerce leader.

Moving over from the term, “omnichannel” physical stores and online stores have now come to be seen as a single entity and many retailers and online traders are hopping in on the bandwagon to integrate the two.  Experts believe neither of the two channels of retailing works well on their own, and this thinking is reflected in Amazon’s strategy of acquiring Whole Foods too.

What is the impact on Whole Foods?

The acquisition by Amazon could be seen as a solution to the recent spate of problems at Whole Foods.  Declining same-store sales over six quarters and closure of nine stores had already led to pressures from shareholders to sell. A board overhaul with five new directors appointed by Whole Foods Market Inc did not exactly please investors, Jana Partners, who were miffed at the lack of grocery experience in the new members. While the takeover ends at least some of the problems for Whole Foods, speculations are rife over how many job cuts the supermarket will face. Amazon, well known for its penchant to automate and cut back on human resources, as of now has denied any plans of automating the shopping experience at Whole Foods.

Job cuts are not a new threat for Whole Foods employees, with more than 1500 jobs lost in the past two years thanks to the poor show in sales figures. Whole Foods also could lose its pricey and niche tag in the upscale locations it operates in. Amazon not only plans to slash prices but also stock mainstream foods that hitherto were not the forte of the supermarket chain. Experts also believe these changes, if at all they occur, are a long way off. For now, it seems a win – win situation for both Amazon and Whole Foods.

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