Amazon’s Whole Foods Acquisition
Amazon’s Appetite
Amazon took Whole Foods off the shelf and put them into their conglomerate shopping cart in 2017, when they acquired the grocery chain for 13.7 billion USD. The acquisition came at a shock to the market as Whole Foods was facing several issues in their business model. Debt, high prices, and an inefficient supply chain made Whole Foods unappealing from a business perspective, making the 27% premium that Amazon paid seem rather pricey.
The Whole Foods acquisition was based on the idea of revenue synergies where a combined entity of Amazon and Whole Foods sought to increase revenue via increased pricing power, market reach, and cross-sell opportunities. At the time of offer, Amazon estimated that 75% of Whole Foods customers were Amazon Prime members, meaning they would benefit from Amazon services being available at a grocery store they frequent. This statistic was appealing to Amazon because they wanted to increase their brick and mortar presence as a retailer.
Digesting the Purchase
After the acquisition cleared in Q3 of 2017, Bezos began altering Whole Foods’ customer image. First addressing Whole Foods’ increasingly high price tags and cut prices by 43% within the first month after the acquisition. Moving away from “whole paycheck” prices meant more people would shop at Whole Foods and potentially become Amazon customers over time.
Within the organic grocery market there is an underserved majority who only buy from places where they know how the supply chain operates and where the store sources their produce from. Bezos recognized this gap in the market and created a “foragers” division for each region Whole Foods serves. These foragers would go into the local markets, find local producers, and add them to their local Whole Foods’ supply chain. Since the acquisition, Bezos added over 3,000+ local producers to Whole Foods stores and implemented a pallet-to-shelf system to avoid products sitting out in unsanitary storage areas. This decision appealed to the underserved majority Bezos was targeting because those consumers became more confident in the cleanliness of their food.
Whole Foods was rebranded with Amazon using Whole Foods’ stores as a brick and mortar location for online order pick ups. Becoming a place where Amazon customers could pick up their online orders for both Amazon and Whole Foods. This provided Amazon with a 3% increase in spending per customer within Whole Foods, a material indicator of the revenue synergies theorized at the time of the acquisition. Amazon also began delivering groceries in the first quarter of 2018 in select cities, which accelerated their online grocery segment.
Industry Reaction
The grocery industry in the U.S. is valued at 1.2 trillion USD and its biggest players are Kroger, Costco, Walmart, Target, and Whole Foods. When the acquisition was announced, Amazon’s stock rose 3% while the other main grocers saw sudden dips in their stocks, signaling market pessimism on competitors despite Whole Foods’ smaller market share of 2%: Kroger (-9%), Costco (-6%), Walmart (-5%), and Target (-5%).
Specifically, because of Amazon’s extensive network to deliver packages, investors and competitors realized Amazon could quickly begin delivering groceries to the homes of customers. To prevent loss of customers, these brands began to overhaul their own home delivery solutions: Kroger (2018), Costco (Q4 of 2017), Walmart (2019), and Target (2018).
The acquisition led to these brands creating or increasing advertising for their own private labels in reaction to Amazon creating Prime Member discounts for shopping at Whole Foods. As the biggest online retailer, Amazon has a larger customer base than any of the other grocery competitors. This made brands like Costco, who require a membership to shop there, rush to advertise their own private brands more broadly to inspire more loyalty out of customers: Kroger (Private Selection), Costco (Kirkland), Walmart (Bettergoods), and Target (Good & Gather).
Is Whole Foods Healthy for the Market?
For Whole Foods, a company whose market share is only 2%, to cause companies like Walmart and Kroger (a combined 34% of the grocery market share) to implement vertical business changes highlights the influence a corporation of Amazon’s size has. Walmart bought several ecommerce startups to compete with Amazon’s online presence and experimented with 24-Hour Kiosks to beat Amazon with accessibility to product. Kroger invested in Kroger Ship to compete with Amazon Prime’s same-day grocery delivery.
The Federal Trade Commission took two months to approve the acquisition as federal anti-trust laws were a primary concern for the deal. After the acquisition was made, the market underscored their concern with a conglomerate taking over a sector of industry. Now, while Whole Foods isn’t dominating the grocery industry, it is important to note how effective the acquisition was in increasing the competitiveness of the market. After eight years Whole Foods is nowhere near being a monopolistic competitor in the grocery industry, but they have demonstrated how a large corporation can buy into an industry and ripple changes throughout it.
