By James Lakin | SEATTLE
Amazon announced today, its plans to purchase the high-end grocer, Whole Foods, for 13.7 billion dollars. This is the largest purchase the e-commerce giant has made to date. Whole Foods has been under attack by activist investors who are dismayed by the sluggish sales growth made by the grocer and provides an opportunity for shareholders to be reconciled amid the lack of growth.
“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,” John Mackey, Whole Foods’ CEO, said in a statement.
Mackey will remain the CEO of Whole Foods after the buyout is complete.
This buyout is not unprecedented, it is a result of months of attack by Walmart.
After the acquisition was announced shares of Whole Foods skyrocketed 29% while shares of Amazon rose a modest 3%. However, the more substantial news is how other grocers were affected.
What It Means For Other Grocers
The purchase of Whole Foods by Amazon has come with consequences for competitors. Nearly 40 billion dollars of market value was wiped out from other companies following the buyout. Such a drop in value was exemplified in companies such as Kroger(NYSE: KR), Costco(NASDAQ: COST), and Walmart(NYSE: WMT). The blow was particularly catastrophic for struggling grocery giant Kroger, which has lost over 30% of its market value in the last 2 days.
Costco has also suffered a great deal, having been downgraded by Goldman Sachs and losing over 6% in market value in the last 24 hours. This is a result of the direct competition they now face with Amazon. Both Amazon Prime and Costco members earn, on average, over $100,000 a year, placing Costco in direct competition with Amazon.
Amazon has consistently pummeled its competitors in a variety of industries. In recent months retail stores have been impacted by their shrinking market cap as Amazon obliterates them and FedEx(NYSE: FDX), who was Amazon’s distributor, has nearly stagnated in growth, as Amazon is looking to move towards its own means of distribution. Amazon’s impeccable ability to become the leader of whatever industry it takes on has made it a dangerous jack of all trades, and as investors come to this realization grocers’ values will continue to slump.
Moreover, big box goliath, Walmart(NYSE: WMT) has been attempting to adapt to the new marketplace created by Amazon in recent months. Their recent acquisitions have predominantly been in the e-commerce industry. They have purchased Jet.com, Hayneedle.com, and Bonobos, among other e-commerce sites in recent months. This is in an effort to counteract their shrinking market value.
It now appears that Amazon has gone on the offensive attack, going after Walmart’s area of expertise, groceries. Walmart dominates the supermarket industry, recently becoming the number one grocer in the country. This purchase is a clear act of retaliation by Amazon.
Another motivation for the acquisition could be based on the recent expansion into the grocery industry through their product, Amazon Fresh. Whole Foods would provide for Amazon the infrastructure needed to expand into new markets. The product is expanding, particularly among a younger demographic. Millennials are 25% more likely to use the product vermiddle-agedaged individuals.
This buyout provides for Amazon an opportunity to expand in a market it has not yet exploited and has proven to be catastrophic to the supermarket industry. It is the largest buyout the company has ever made and empirical proof to Walmart that the war they have begun is one they are ready to fight.