E-retailer Amazon has announced it plans to acquire Whole Foods Market in a $13.7 billion deal, solidifying its position in the supermarkets and grocery store industry.
According to Mergermarket, the bid is not only one of the decade’s top grocery deal in the US, but is also the fourth largest US deal in the retail subsector. The deal is largely being seen as a way for Amazon to move more into the brick-and-mortar space, which is not new for the company.
“We’ve seen Amazon expand recently into physical, brick-and-mortar stores, for example their new bookstores and Amazon Go, their small grocery store experiment that doesn’t require a customer to go through check out,” says Elizabeth Lim, senior analyst for Mergermarket.
Whole Foods holds a 2.7 percent market share in the $611.9-billion grocery store industry. According to Madeline Hurley, IBISWorld senior analyst, this acquisition means Amazon will be able to reach more consumers than ever before.
“While Amazon utilized Amazon Fresh to deliver groceries, the company now will be able to tap into the $611.9 billion brick-and-mortar grocery stores industry,” she says. “They now will be able to operate in the grocery market through multiple channels.”
Online grocery is expected to grow in the US over the next few years, according to Hurley, with revenue increasing at an annualized 10.1 percent to $13.5 billion over the past five years. Amazon has an obvious ability in e-commerce, but retailers such as Wal-Mart and Target have recently aggressively stepped up their digital efforts. And this might have entered into Amazon’s bid for Whole Foods.
“The grocery business is a huge market, and by tapping into that and leveraging their e-commerce dominance, Amazon is in a position to increase its brand awareness with customers beyond books and gadgets, and especially when it comes to making food choices,” says Lim.
What this deal means for food manufacturing is unclear yet. Mergermarket’s Lim says the first challenge for Amazon is how to successfully run a physical supermarket chain.
“From that, and depending on what they learn, we could see a strategy emerge in other realms, for example food manufacturing,” she says.
However, Amazon has been signaling its interest to enter the food industry. Recently, 915 Labs, which manufacturers microwave assisted thermal sterilization equipment, announced it created signature dishes, including macaroni and cheese and an egg frittata, to launch in partnership with Amazon and a food company on the Amazon Exclusive platform.
“Amazon already sells some private label groceries online,” says IBISWorld’s Hurley. “Additionally, over the past year, Whole Foods has also pushed their private label offering, especially with the roll out of their spin-off store 365 by Whole Foods. It is likely that Amazon will utilize Whole Foods to even further expand their private label offering.”
This deal largely ensures brick-and-mortar stores will not disappear anytime soon.
“But it will put more pressure on other physical supermarket chains, particularly ones that don’t have an owner with as deep of pockets as Amazon that can leverage technology, scale, and data on customer preferences,” says Lim. “Instead, what we may see is an increased use of technology in the supermarket to help us make our shopping decisions and also how we pay for things.”