Amazon chows down on Whole Foods, acquiring at $13.7 billion – it just makes sense

SUMMARY:

Amazon just made a knock out bid for Whole Foods. This has the potential to fundamentally change the retail landscape. Both benefit from modern technology.

Storefront in Venice CA © Whole Foods MarketThe news, first broken on Bloomberg, that Amazon is acquiring Whole Foods for $13.7 billion represents a clear indication of just how powerful, the FANG group has become. Bloomberg described the deal as:

…a bombshell of a deal that catapults the e-commerce giant into the supermarket business with hundreds of stores across the U.S.

U.S. retail stocks shuddered in reaction with Kroger, Target and WalMart all shedding billions of dollars in stock value following the announcement. And while this might seem like a regional deal – grocery retail is essential a local type of operation – UK retailers Ocado, Sainsbury and Tesco all took a beating in the markets. That might be because while Whole Foods is firmly centered in the U.S. it does have operations in the U.K.

While many commenters expressed shock at the deal, it makes sense both financially and logistically. Amazon could have paid the entire amount out of existing cash reserves and left change in the bank of around $2 billion. Instead, Amazon has chosen to finance through a loan led by Goldman Sachs. It’s an easy option when your stock price rises 3.1% on this announcement and hovers around $475 billion.

Whole Foods had become something of an acquisition target following activist concern by Jana Partners, a hedge fund that John Mackey, Whole Foods co-founder and chief executive pithily described as ‘a greedy bastard.’ Terms say that Mackey will stay on and that Whole Foods will retain its brand identity.

This has to be a great move for both parties. Amazon, which has been dabbling in grocery retail with its own bricks and mortar Amazon Go experiments, now gets instant access to a large nationwide network of 465 stores both in the U.S. (430) and the U.K. Retail analyst Michael Pachter at Wedbush Securities Inc. claims Amazon:

…has spent years trying to break into delivering groceries, but hasn’t been as successful as in other categories…

…“Amazon clearly wants to be in grocery, clearly believes a physical presence gives them an advantage,” Pachter said. “I assume the physical presence gives them the ability to distribute other products more locally. So theoretically you could get 5-minute delivery.”

An instant casualty will likely be online grocery retailer Instacart, which includes Whole Foods as a supplier among the 160 that include Kroger, Costco and others. For its part, expect Costco to expand its relationship with Shipt and Instacart as well as ramping up its relatively slow pace of digital adoption.

On the technology front, things look mighty interesting. Earlier in the year, Phil Wainewright reported that:

In a major coup for its GT Nexus division, enterprise software giant Infor says it has inked a deal with Amazon that will see the ecommerce giant running its transportation and logistics in part on the GT Nexus platform.

And in the same piece, Wainewright penned the more prescient:

Being chosen to help out Amazon run its logistics operations is a real feather in the cap for Infor — even though some of its retail customers may wonder what exactly the vendor is going to be helping Amazon achieve. But with the likes of Whole Foods Market and DSW teaming up with Infor to help co-develop its retail management applications even though they’re AWS hosted, this may prove another element of ‘co-opetition’ they can live with. It’s even possible (although let’s be clear, I’m in the realms of complete speculation here) that Infor sees the potential to build Amazon logistics as a back-end service into its retail offerings at some point in the future.

Around a year ago, Derek duPreez got an insight from Whole Foods about the extent to which it is overhauling internal and POS systems. Infor is in the mix there. Assuming that project is on time then the replacement, cloud based systems should be coming online right about now.

It is rare to find a deal where a single supplier is on both parts of the logistics swamp. In those terms, the Whole Foods acquisition must put Infor in a very strong position to argue ‘end to end’ process, all run in the Amazon Web Services cloud and at significant cost savings to Amazon along the way.

Moving into the realm of speculation, Amazon now gets access to a vast store of customer activity data that it can use alongside its own algorithms to better understand customer preferences and so streamline physical inventory while at the same time utilizing the Whole Foods real estate to act as drone delivery centers.

My take

Retail is one of the more visible market sectors that is undergoing change although at times you’d be hard pressed to know that at the point of sale.

Amazon was sniffing around Whole Foods last year but the Jana Partners activism drove that interest to the front of the acquisition agenda. In those terms, Amazon has had plenty of time to work out how it plays the post acquisition merging and development of systems that are already modern and full of promise.

Operational efficiencies aside, this acquisition opens the door for Amazon to think seriously about that golden ‘5 minute delivery’ opportunity. If, as seems likely, Amazon will at least push forward with those experiments then that alone will represent a significant threat to WalMart and regional retailers. Couple that to the potential swilling around in the data lakes Amazon now has in its grasp and you can readily imagine how Amazon takes this as an opportunity to make an innovative leap forward rather than incremental steps.

This is all, of course, subject to regulatory clearance. Can anyone seriously imagine the animus between Jeff Bezos, CEO Amazon and POTUS Donald Trump getting in the way of this deal closing out? Hmmm…

Image credit - via Whole Foods

Disclosure - Infor is a premier partner at time of writing