On June 16, Amazon announced it has agreed to acquire Whole Foods Market, Inc. for $42 per share in an all-cash transaction valued at approximately $13.7 billion, including Whole Foods Market’s net debt. Whole Foods Market will retain its headquarters in Austin, Texas, and John Mackey will remain CEO.
Gregg S. Lipman, managing partner of CBX Group, said online retailers like Amazon and China’s Alibaba Holding Group Ltd. have depended and continue to depend on highly competitive pricing to sustain growth.
|Gregg Lipman, managing partner of CBX Group|
“The pressure they exert on suppliers is stifling,” Lipman said.
Amazon dominates numerous retail categories and now has its eye squarely targeting food, he said.
“At what point do they own the entire food chain, whether in equity or buying power?” he said. “Remember, Amazon is willing to lose money to win market share and kill off competitors. This should be a concern, not only for food retailers, but also for food brands.”
“We’ll see what happens now that Amazon will have Whole Foods shelf space to experiment with IRL (in real life).”
Todd Maute, a partner at CBX, said Amazon always can be counted on to disrupt.
|Todd Maute, a partner at CBX|
“The possible effects on Whole Foods alone are interesting to contemplate,” Maute said. “For example, the consumer perception of Whole Foods is that it is overpriced. But given its massive buying power, Amazon could actually leverage its economies of scale to bring down prices in the aggregate and change this perception in ways that would make Whole Foods a lot more competitive.”
Investment analysts also have homed in on the intensifying food price competition that may result from Amazon’s acquisition of Whole Foods.
|Rob Moskow, an analyst with Credit Suisse|
With food companies already reengineering their supply chains and packaging to fit into Amazon’s system, the online giant’s leverage with the companies may increase still further, said Rob Moskow, an analyst with Credit Suisse, New York.
“Both Amazon and Whole Foods have a reputation for being tough customers and are likely to exert significant power over their suppliers,” he said.
Heightened food price competition was implicit in significant declines sustained in the share prices of food companies and food retailers after the transaction was announced, said Brett Hundley, an analyst with the Vertical Group, Richmond, Virginia.
|Brett Hundley, an analyst with the Vertical Group|
“The deal has the potential to significantly alter the retail food landscape and, by extension, the packaged food space,” he said. “We are not surprised then, by initial stock weakness for many US food retailers and producers on Friday.”
Hundley said Amazon ownership could result in lower prices at Whole Foods two ways — with Amazon altering the business model to one with greater efficiency or operating with tighter profit margins than Whole Foods. He said it is important to consider the transaction through the prism of other major changes in the retail marketplace.
Nicholas S. Fereday, a senior analyst with Rabobank, New York, said Amazon’s designs on the food market extend beyond the affluent Whole Foods customer base.
|Nicholas Fereday, a senior analyst with Rabobank|
“If Amazon steers Whole Foods away from its ‘whole-paycheck’ image (the company recently offered up a discounted Prime subscription for the 40 million-plus adults on food stamps) and/or successfully sells Whole Foods products online, then Big Food faces the threat of losing even more market share.”
Beyond a brief statement, Jeffrey P. Bezos, Amazon’s CEO, has not commented much on his company’s plans for Whole Foods. Perspectives on what the acquisition might mean for Whole Foods were shared by John Mackey, CEO of the retail chain, at a town hall meeting with employees June 16 in Austin. Fundamentally, the new owner of Whole Foods will have a different time horizon for success than Whole Foods experienced, particularly in recent years when growth slowed, he said.
|John Mackey, CEO of Whole Foods|
“I can’t tell you all the amazing things that will happen over time, but one thing I absolutely love, love so much about Amazon is they think long term,” he said. “They have had the courage that almost no other public company has had the courage to, basically, resist the drumbeat of short-term, quarterly earnings that have had us trapped here for a couple of years, as our same-store sales — came down.”
A bit more specifically, Mackey said Amazon ownership is likely to bring considerable innovations into Whole Foods stores.
“And I think we’re gonna see a lotta technology,” he said.
“We’ve got a lot invested in our brand, and these guys are really smart people,” he said. “They’re not stupid enough to go change that.”
That said, Mackey told his Whole Foods colleagues to expect significant change from a corporate perspective.
“When this deal closes, we’re all Amazon people,” he said. “We’re not Whole Foods people and Amazon people. We’re all Amazon people. We’re one large tribe, one large family.”