The Bitter Taste of Acquisition: What Amazon’s Whole Foods Deal Means for Peers
The deal in brief
Amazon.com (AMZN) announced the acquisition of Whole Foods Market (WFM) on June 16, 2017, for $13.7 billion. Whole Foods will continue to operate under the Whole Foods Market banner after the merger, and the deal is expected to close by the end of 2017.
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How did the announcement impact retail stocks?
The deal sent tremors across the US food retail sector on fears of a further rise in competition in a struggling grocery market. The stock prices of food retail biggies like Kroger (KR) and Wal-Mart Stores (WMT), as well as those of smaller fishes like Sprouts Farmers Market (SFM), tumbled on the announcement.
KR, WMT, and SFM plunged 9.2%, 4.7%, and 14.4% respectively, on June 16. Whole Foods, however, gained 29% during the day.
How does the deal benefit Whole Foods?
Whole Foods was struggling with falling comps (comparable same-store sales) and contracting margins as traditional grocers like Kroger filled their shelves with cheaper organic products.
The deal with Amazon should provide WFM the much-needed strength needed to survive in an intensely competitive grocery market. Technology and Amazon’s vast consumer base have the capability of talking Whole Foods to new heights.
How does the deal benefit Amazon?
Amazon has been present in the grocery industry for about ten years but had not been successful in making its mark—until now. Acquiring Whole Foods should expand its brick-and-mortar presence through the organic food retailer’s 460 stores, which Amazon can use as pick-up centers as well.
What the deal means for food retail
Without a doubt, the deal will mean a further rise in competition and more price investments by grocers, implying a further squeeze among already thin margins.
What the deal could also mean is a paradigm shift in the way grocery shopping is done—likely, a shift away from the brick and mortar channel, which still accounts for 98% of grocery sales, to the online channel.
Investors seeking to add exposure to Whole Foods can consider the Market Vectors Retail ETF (RTH), which invests 2.3% of its portfolio in the company.