Amazon Gobbles Up Whole Foods Market for $13.7 Billion

Amazon today announced it will acquire Whole Foods Market Inc. for $42 per share in an all-cash transaction valued at approximately $13.7 billion. The deal, expected to close during the second half of 2017, signals times are changing for the grocery retail sector.

The blockbuster deal—the largest in Amazon’s 23-year history—will allow the e-commerce giant to expand its online presence and accelerate its brick-and-mortar grocery retail strategy. The company already has tested the waters through its AmazonFresh online grocery delivery service and its Amazon Go retail concept.

Whole Foods is the No. 1 natural and organic foods retailer and rang up sales of approximately $16 billion in 2016. The company has more than 460 stores in the United States, Canada, and the United Kingdom.

Commonly referred to as “Whole Paycheck," the grocery chain has been chided by consumers for higher-than-average prices, albeit it for products that are natural and organic. Amazon's ability to offer products at lower prices just might mean Whole Foods will lower prices, which in turn, could attract cost-conscious consumers who normally shop at big box retailers like Walmart and Target—both of which have upped the ante in the grocery sector. Walmart and Target have rolled out aggressive e-commerce programs.

Whole Foods also has been under fire for more than a year from a number of fronts including an attempted shareholder takeover, lingering legal battles, and lagging sales due to traditional grocery chains adding more natural and organic products to their aisles. In May 2017, the grocery giant “refreshed" its Board of Directors by appointing five new independent directors, and elevating Gabrielle Sulzberger to the position of Chair of the Whole Foods Market Board of Directors. Mary Ellen Coe also was appointed Chair of the Nominating & Governance Committee.

“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy," said Jeff Bezos, Amazon founder and CEO. “Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades—they’re doing an amazing job and we want that to continue."

Whole Foods Market will continue to operate stores under the Whole Foods Market brand and source from its vendors and partners around the world. Mackey will remain as CEO of Whole Foods Market and Whole Foods Market’s headquarters will stay in Austin, Texas.

Commenting on the deal, John Mackey, Whole Foods Market co-founder and CEO, 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."

So What’s The Big Deal?

Elizabeth Lim, senior analyst, Mergermarket, said the transaction is the second-largest U.S. grocery deal on record after Cerberus Capital Management, CVS Health Corp and SuperValue bought out Albertsons in 2006 for $17.4 billion. In addition to being the top grocery deal in the United States over the last 10 years, the Amazon/Whole Foods transaction is also the fourth-largest U.S. deal in the retail sub-sector on Mergermarket record.

U.S. retail mergers and acquisitions in the year to date have reached 53 deals worth $23.4 billion, up 432 percent in value, or more than five times the sub-sector’s total deal value from the same period in 2016. According to Mergermarket data, the deal further boosts the overall consumer sector, which is the top industry so far in 2017, reaching 202 deals worth a total of $127.3 billion. Of this, retail accounts for 18.4 percent of the sector’s value.

“Structural changes in retail have put a lot of pressure on brick-and-mortar supermarket chains in recent years. With changing consumer habits spilling over into decisions in the grocery aisle, and food retailers ceding some market share to even Amazon as well as e-commerce upstarts in the bourgeoning grocery and meal kit delivery space, an uptick in consolidation in the food retail industry is not surprising, with further M&A opportunities expected as assets become available amidst increasing competition, store closures, and bankruptcies," Lim said.

The Amazon Effect

This latest targeting of a prime retail sector is not the first, and it won’t be the last. The company already has successfully cut into sports nutrition, vitamins, and supplement industries via its online presence.

In May2017, Vitamin Shoppe highlighted ongoing challenges in its sports nutrition business, including falling comparable sales tied to the promotional environment in the sports market. In discussing disappointing first quarter 2017 (1Q17) results, Vitamin Shoppe CEO Colin F. Watts, noted within the sports category, the competitive pressure has most affected protein and on-the-go nutrition (primarily bars), followed by sports supplements.

In 2016, INSIDER reported Amazon as the new king of the online protein sales category, passing former leader BodyBuilding.com. Combining all of its online businesses, Amazon is responsible for 57 percent of all online protein powder purchases, and its subscription service outgrew all others with a 3-share-point increase year over year, according to market research firm 1010data.

As both protein and fitness increasingly appeal across demographics, mass retailers have been drawn to the sports nutrition and fitness category, Watts explained. The cluster of brands driving the highest market share have redirected their efforts toward online and mass channels, leaving specialty retailers like Vitamin Shoppe in a difficult competitive position.