Published: Mon, June 19, 2017
Industry | By Dora Warner

Amazon to buy Whole Foods for $13.7b

Whole Foods has seen its sales slump and recently announced a board shake-up and cost-cutting plan amid pressure from activist investor Jana Partners. Whole Foods is courting the discount shopper with its lower cost brand 365.

Amazon has been accused of destroying portions of the entire brick-and-mortar retail economy. Shares of Kroger, however, plunged 14% to $21.13, their lowest level in three years, on investor fears about the largest USA supermarket operator's competitive position.

Excluding debt, the deal is valued at US$13.39 billion, based on 318.9 million diluted shares outstanding as of April 9. Shares of Wal-Mart Stores Inc. fell 4.7 percent to $75.24, and Target shares dropped 5.1 percent to $52.61, signaling fears that Amazon could reduce Whole Foods' prices and broaden its product mix.

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"This partnership presents an opportunity to maximise 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", said Whole Foods chief executive John Mackey. Amazon and Whole Foods expect to close the deal during the second half of 2017. The deal now gives Amazon control of those 431 stores, almost all of which are in neighborhoods that are more affluent and younger than America as a whole. "Books are lot more homogenous", she said, noting that a hardcover Harry Potter book is the same at Amazon - though Amazon can sell it at a lower price. In the course of a day, Amazon's attempts to become the world's biggest retailer (online and off) took a pivotal leap forward.

But shoppers could start to grow more comfortable buying, and Amazon sees the grocery business as a hot market because shoppers buy weekly or even more often for items they run out of.

News of the deal sent shares of traditional retailers such as Walmart, Target, Costco and Kroger tumbling as much as 13 per cent as investors tried to digest the implications of an Amazon-backed grocery chain. In order for Amazon to get the volume growth they are looking for, fresh foods has to be part of the equation. The company is slowly building a fleet of outlets, cementing its supermarket dreams.

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The online giant past year declared its plans to open a physical grocery store called Amazon Go, a market without cashiers where consumers would be automatically charged based on the items they placed into their shopping bags.

Amazon says in a statement that it has "no plans to use the technology developed for Amazon Go to automate the jobs of cashiers at Whole Foods". According to multiple reports, Whole Foods also invested in Instacart.

The S&P 500's retail and food categories were hit particularly hard by the news - especially retail businesses who have expanded into the grocery realm in recent years.

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