June 16, 2017

Amazon has made a massive bet on the natural and organic food sector, announcing its planned acquisition of Whole Foods in a deal worth $13.7 billion including debt.  

The global e-commerce giant has agreed to pay $42 in cash per share for the organic grocer, reflecting a 27 percent premium over the stock’s price on Thursday, June 15.

The deal, which is by far the largest in Amazon’s history, will launch the company into the brick and mortar space, gaining it 450 Whole Foods stores located across 42 states.

For years Amazon has worked to build a grocery business to tap into the consumer food category worth $600 billion, but with tepid results. Most recently, the company conducted trials for two AmazonFresh Pick Up sites in Seattle as it strives to surmount challenges inherent to the concept, including consumers wanting to choose their own fresh produce and the logistics of rapidly needing to deliver perishable foods, according to the Wall Street Journal.

Meanwhile, the acquisition launches Amazon into an increasingly competitive market, as consumers are pulled more and more to alternative sources for their food and new players such as Aldi begin expanding in the U.S. market.

That being said, the bringing together of these two unlikely partners could indicate that for Amazon, it’s more to gain a national distribution network, Wedbush Securities analyst Michael Pachter told Bloomberg.

“If they’re going to be significant players in the grocery space, they’re going to have to attack that industry with a combination of online as well as brick and mortar,” Neil Stern, a senior partner at retail consulting firm McMillanDoolittle, told Food Dive. “It’s a very difficult category to penetrate purely online.”

“Amazon clearly wants to be in grocery, clearly believes a physical presence gives them an advantage,” Pachter said. “I assume the physical presence gives them the ability to distribute other products more locally. So theoretically you could get 5-minute delivery.”

Whole Foods has also faced its share of challenges. Mainstream grocery stores, and even chains such as Costco and Walmart have been enhancing their organic and natural food offerings at lower prices, increasing the pressure on the pioneer in the space which has often been referred to in the past by customers as “Whole Paycheck”.

Additionally, activist investor, Jana Partners LLC, the second largest shareholder in the chain with a 7 percent stake, and Neuberger Berman, which holds a 2.7 percent stake have been pressuring Whole Foods to sell and reimagine its Board of Directors – developments that did not please Whole Foods’ CEO John Mackey who Bloomberg reports told Texas Monthly in a recent interview, “These people, they just want to sell Whole Foods Market and make hundreds of millions of dollars, and they have to know that I’m going to resist that. That’s my baby. I’m going to protect my kid, and they’ve got to knock Daddy out if they want to take it over.”

How Will the Future Look?

Upon the expected closing of the deal in the second half of this year, Whole Foods will continue to operate as its own unit under its same name, and current, outspoken Whole Foods CEO John Mackey will continue in his role leading the company from its headquarters in Austin, Texas.

After waves of negative press over its high prices and New York regulators accusing the chain of inflating prices in 2015, CNN questions whether the influencing hand of Amazon, which is known for its competitive pricing, will raise Whole Foods’ reputation among mainstream consumers. The deal does seem to have had a softening effect upon Mackey however, as he said, “This partnership presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience, and innovation to our customers.”

-Lynda Kiernan

Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration, please contact Ms. Kiernan at lkiernan@globalaginvesting.com.