Amazon buys Whole Foods Market for $13.7 billion

Retailing powerhouse Amazon.com Inc. will buy organic grocery chain Whole Foods Market for $13.7 billion in a move that boosts Amazon's share of the U.S. grocery sector and instantly gives the online giant access to more than 460 brick-and-mortar stores.

The transaction is expected to close in the second half of 2017, following regulatory and shareholder approval. Seattle-based Amazon shared few details on its plans for the merger, but said that Whole Foods would continue to operate stores under its own brand name and that John Mackey, its co-founder, would remain as CEO.

Known for stocking organic foods and charging premium prices, Austin, Texas-based Whole Foods had sales of $16 billion in 2016 and employs 87,000 people. The chain operates stores in the U.S., Canada, and the U.K.

In the short term, the blockbuster move puts enormous pressure on grocers, which have already struggled through a year of disappointing profits. The country's largest supermarket chain, Kroger Co., saw its stock price plunge yesterday after reporting a second straight quarter of declines in same-store sales—stores open more than a year—and lowering its earnings forecast under increasing pressure from competitors, including those that sell groceries and pre-packaged meals online.

Amazon has already put a toe in the water of the $675 billion U.S. retail grocery sector with food delivery services like Amazon Fresh and Amazon Prime Now. But buying Whole Foods shows that the e-tailer is now turning the full force of its nationwide warehouse and logistics network to retail food sales.

"The game-changing piece is that they're now completely vertically integrated into the grocery sector," Deliv CEO Daphne Carmeli said in an interview. Crowd-sourced, last-mile parcel company Deliv competes with Instacart and Amazon in providing same-day delivery for online grocery orders. "Now supermarkets and grocers will have to compete not only with each other and with nontraditional rivals like Wal-Mart and Target, but with Amazon," Carmeli said.

In response to the latest move, rival grocers now need to redouble their efforts to retain their core customers by offering additional services such as home delivery and online ordering, Carmeli said.

Buying Whole Foods also delivers a major blow to Amazon's retail rival Wal-Mart Stores Inc., which had previously seen grocery sales as an area where it could differentiate itself from Amazon, she said.

In the long term, Amazon's acquisition of Whole Foods could have an impact on retail sectors beyond just grocery, because it allows the company to expand from purely online sales into brick-and-mortar stores, industry watchers said.

Amazon could have achieved such physical scale and density by building that footprint itself over a period of years, but buying Whole Foods lets it reach that goal practically overnight, according to a note to investors from investment firm Robert W. Baird.

With Whole Foods in hand, Amazon can also forge a dual-track grocery strategy by connecting its Prime and Prime Now memberships with last-mile delivery, the Baird note said. That is consistent with Amazon's approach of supporting multiple customer touch points and offering as many "modes" of delivery as consumers desire, Baird said.

That practice of meeting customers' fulfillment preferences across all available channels is at the core of omnichannel fulfillment practices, said John Santagate, research manager for supply chain execution at IDC Manufacturing Insights, a consultancy in Framingham, Mass. "Perhaps the acquisition is a means to enable fresh food delivery by leveraging Whole Foods retail stores as distribution centers, enabling Amazon to maintain its online model but do so in a market that has largely lagged in terms of online purchase adoption," Santagate said.

However, the path to merging its online might with a storefront sales environment will not be a simple transition, warned Jeff Smith, a supply chain management and analytics professor at Virginia Commonwealth University. "I think this will open a whole new set of challenges for Amazon, as the inventory control, and associated distribution, will require an additional set of capabilities," Smith said.

Amazon must now decide whether it will maintain Whole Foods' market niche as a vendor of premium organic foods, whether it will manage store inventory for both in-person and online shoppers, and whether it will compete with food delivery services, Smith said.

If Amazon can find the right strategy to manage those challenges, it could use the Whole Foods acquisition as a way to legitimize its grocery arm, leverage its existing distribution capabilities to meet consumer demands, and tap into a rising demographic wave of millennials who use online food delivery at unprecedented rates, Smith said.

Online sales in 2015 accounted for a scant 0.1 percent of total grocery sales, according to Commerce Department data.