Amazon-Whole Foods deal could speed grocery transformation

Posted June 20, 2017

"Grocery chains like Kroger, Target and Wal-Mart are not ready for what Amazon brings to the table with the new and improved Whole Foods".

Amazon is known for driving sales at the expense of profits, Stifel analyst Mark S. Astrachan noted, saying the company will likely maintain that approach as it looks to build market share in groceries. He raised his price target on Whole Foods to $45 after the Amazon deal was announced. The upscale grocery chain recently replaced much of its board, added a new CFO and developed plans to slash costs and tweak operations.

The purchase in one fell swoop gives Amazon, which until now has operated nearly entirely on the internet, a big presence in the brick-and-mortar world on Main Street, with more than 450 stores in the US, Canada and Britain.

Walmart is also expanding its online grocery business by offering curbside pickups for online orders and opening trial drive-up pickup kiosks.

A natural and organic foods supermarket chain comprising more than 460 stores in the US, Canada, and the UK, Whole Foods Market has a workforce of about 87,000.

"Although industry revenue is only set to rise at an annualized rate of 0.8% over the five years to 2022, the transaction will allow the online retail giant to boost not only its grocery sales, but expand its brick-and-mortar presence", IBISWorld Industry Analyst Madeline Hurley said in a statement emailed to press. Specifically, that means more of Amazon's own private-label grocery products in the grocery aisle, according to Bloomberg. While Amazon has been experimenting with "grab and go" tech-enabled grocery stores for a while now, the huge acquisition of Whole Foods shows just how fast this concept could be a reality.

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Texas native John Mackey, who co-founded Whole Foods in 1978, will continue to serve as CEO.

Even at a high-end specialty grocery store nicknamed "whole paycheck", there were inescapable truisms. Additionally, the focus of FedEx and UPS is B2B volume, with traditional e-commerce accounting for a relatively small proportion of their businesses. Fein said that Amazon could eventually do well by targeting consumers willing to pay cash for generic drugs through discount coupons, either because they do not have insurance or could access a cheaper price that way.

Amazon had looked at Whole Foods a year ago but initially decided not to make an offer. Amazon may change the inventory at Whole Foods as part of broad effort to lower prices.

On the flip side, private label manufacturers such as Treehouse Foods and SunOpta "are likely to be beneficiaries in volume terms, although as we saw in recent earnings results, even they are not immune to pricing pressure from incumbent brick and mortar players and could see some pushback on pricing from the online retailers as well", said Howard and Romariz.

While the WFM deal has broad implications for Amazon (physical locations are a major shift in strategy), no change on the firm's thesis on the stock. "It is a tsunami that will shake up and change grocery retailing". Wholepeople.com, Whole Foods' e-commerce subsidiary, didn't end well: The company had hoped to take it public, but instead spun it off and took a $500,000 write-down.

Does Amazon stock depend on Whole Foods? Wal-Mart is not now testing anything similar, though the company is working on initiatives such as an automated shopping cart to make it faster and easier for customers to pick up their daily grocery needs.