Whole Foods Market ($WFM) and Amazon ($AMZN) announced a definitive agreement today (signed yesterday) in which Amazon will acquire Whole Foods for $42 per share-- valuing the deal at $13.7 billion including Whole Foods' net debt. Per the agreement: Whole Foods will keep its brand, management team, and business model; and Whole Foods is subject to a $400 million termination fee if it accepts a superior offer by an alternative bidder.
“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and CEO. “Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.”
Why Walmart, Kroger, and Other Competitors Shouldn't Be Too Concerned
If you look at how other news outlets are reporting this acquisition, you would think this is a death sentence for companies like Walmart and Kroger. Today, Kroger ($KR) stock dropped over 9% and Walmart ($WMT) dropped 4.5%. However, the news articles and the market price reactions are not rational.
First, there is an expectation that Amazon will automate Whole Foods' business operations. As the Washington Post writes, "People are worried Amazon will replace Whole Foods workers with robots." Since many grocers already offer self-service checkout lines, this expectation suggests Amazon will be replacing Whole Foods inventory workers with robots. This is irrational because Amazon has not even replaced its own inventory workers (at its distribution centers) with automation.
Second, there is a worry that Amazon is going to initiate a price war with Whole Foods' competitors like Walmart and Kroger. Initially, this seems like something Amazon could do since it has pursued this strategy in its other business. However, this is once again irrational upon further analysis. Whole Foods' business model is predicated on the concept that people will pay more for fresher, healthier food. As a result of this business strategy, Whole Foods' produce has a much higher price tag than Walmart and Kroger's produce. If Amazon wanted to initiate a price war in the grocery space, why would it acquire the grocer with the most expensive produce? For Amazon to cause a true grocery price war through its acquisition of Whole Foods, it would have to use predatory pricing-- an illegal strategy.
This Acquisition Was for Whole Foods' Locations
The most logical reason why Amazon would acquire Whole Foods is so that it can incorporate Whole Foods' store locations into Amazon's formerly meager brick-and-mortar presence. Amazon will gain access to roughly 440 physical stores in the US from this acquisition. This past March, Amazon launched a service known as AmazonFresh Pickup. Essentially, this service allows customers to order groceries online and choose a time to quickly pickup their order from the store.
AmazonFresh is not a result of innovation. Grocers in the UK and Canada have been offering pickup services for years now. Furthermore, it does not differentiate Amazon from other US grocers. Walmart and Kroger both already offer online-to-offline (O2O) pickup services.
If anything, Amazon's deal with Whole Foods has caused Whole Foods' competitors to become more attractive investments. One lesser known competitor, Sprouts Farmers Market's stock ($SFM) took a 6% hit today. SFM has experienced significant growth in the past couple years, and its business fundamentals are strong. Another competitor (previously mentioned), Kroger ($KR), now trades at only 10.8 of earnings after losing over 9% today. Additionally, Kroger has a 2.1% annual dividend yield.