SURVIVAL OF THE FITTEST

Who wins and who loses in Amazon’s blockbuster deal to buy Whole Foods

The seismic shocks of the news are still rippling across the markets, bringing to bear the impact of Amazon’s decision to acquire Whole Foods for $13.7 billion.

“Every grocer will remember this day as the beginning of a new era, and many are scared,” says Phil Lempert, a veteran supermarket analyst.

The deal will impact more than supermarkets, though. It will hit merchants across the broader retail industry, as well as food-delivery companies, stock investors, and maybe even the drone business. Here’s a quick rundown of winners and losers from the deal—as well as a few entities whose fates hang in the balance.

The winners: Amazon, Whole Foods shareholders, Amazon Prime subscribers

The most obvious winner in the deal is Amazon, which for $13.7 billion bought a major berth in a market that CEO Jeff Bezos has long deemed desirable. Over 20 years, Amazon has managed to disrupt the publishing industry and general retail, but in the world of food it has generally been on the outside looking in, dabbling mostly in food-delivery services.

One challenge of groceries is their perishability. They’re not your run-of-the-mill Amazon warehouse products. Fresh food has to be delivered quickly, and safely—and that can be expensive. The Whole Foods deal gives Amazon a huge, new sandbox in which it can toy with ideas for way to solve some of those problems. It also comes with more than 460 brick-and-mortar locations in the US, Canada, and the UK, not to mention a well-oiled supply chain and a stable of relationships with hundreds of farmers and popular health food companies.

Then there are the Whole Foods’ shareholders, who for seven straight quarters have fretted about the direction of the company as same-store sales slumped. The brand really earned the nickname “Whole Paycheck” for stocking many products that would be considered cost-prohibitive for a large segment of the population (remember when Whole Foods sold $6 asparagus water?), while competitors such as Kroger and Trader Joe’s were able to sell some of the same kinds of organic or otherwise hifalutin foods for less. There was a lot at stake for investors—and then Amazon swooped in with its offer to pay $42 a share, a 27% premium to Whole Foods’ closing price yesterday.

As for Amazon’s shareholders, consider the turnaround The Washington Post experienced after Bezos bought the paper and came in with financial resources and innovative ideas. The prospect of a similar rebound just in the Whole Foods business alone has to make shareholders giddy.

Then there are the consumers, particularly Amazon Prime subscribers, who enjoy free two-day shipping (and, in some zip codes, free same-day delivery), access to music and video libraries, and a six-month subscription to The Washington Post, among other things. It’s within reason to figure Bezos will use the Whole Foods acquisition to rope more people into the orbit of Amazon Prime services, and what better enticement than food?

One other potential beneficiary of all this: The drone industry, which is due to get a lot bigger if Bezos has his way. It’s one thing to build a fleet of drones to deliver occasionally purchased items like Amazon Fire Stick streaming devices (one of which was contained in the first package Amazon delivered to a customer by drone, back in December). There may yet come a day when drones are bringing dinner ingredients to our doorsteps multiple times a week.

The losers: Kroger, Walmart, and anyone else selling groceries

If you run pretty much any other supermarket company, there’s now reason for concern. If that sounds alarmist, consider the state of the book retailing and publishing industries, which for some time ignored Amazon as a serious threat.

In the grocery business of late, entrenched US players have mainly been staring down the threat of incoming foreign discount brands such as Lidl and Aldi. Amazon has been on their radar, too, but Amazon moves to the top of the list with its purchase of Whole Foods, Lempert says.

Big-box grocery chains are now staring down the gauntlet of the internet, and how it could reshape the way people shop for food. Despite the inroads made by the early arrivals to the online grocery business, most people still get into their cars and push supermarket carts up and down store aisles to buy their food. It’s conceivable that Bezos will attempt replace those cars with mouse clicks.

We’d be amiss not to call out two specific names among the many possible victims: Kroger and Walmart. A day before the Whole Foods deal was disclosure, Kroger’s stock got slammed, falling in value by nearly a fifth, after the US’s largest traditional grocery seller cut its annual profit forecast by 10%, citing competition as one of the main reasons for the more conservative projections. When Amazon showed up today with its shock announcement, Kroger shares plummeted once again. At midday Friday, the stock was trading at $21.63, marking a 29% drop in two days. As for Walmart, its physical presence—which it has been leaning on harder as competitive answer to Amazon—suddenly looks like less of a decisive advantage, now that hundreds of Whole Foods stores are about to enter Amazon’s orbit.

To be determined: Instacart, John Mackey, Whole Foods employees

The Amazon-Whole Foods acquisition announcement is still young; there are a lot of ways this can go. One company that will be especially interesting to watch now is Instacart, a delivery service that has already morphed its business model to catch up with fast-shifting retail trends. It embeds its delivery workers in stores including Whole Foods, which has invested in the delivery startup. It also has been experimenting with a flat-fee delivery pass not unlike the Amazon Prime membership.

Incidentally, Instacart CEO Apoorva Mehta spent two years working at Amazon as a supply-chain engineer. The big question for him now is whether Amazon’s purchase of Whole Foods spoils his pitch to other retail chains he’d like to see using Instacart as a delivery service—mainly, that it’s a way to compete with Amazon.

Then there’s Whole Foods CEO John Mackey, who remains in his leadership position as part of the deal. In one sense, that already makes him a winner—it’s a generous outcome for someone who presided over the last seven quarters of poor growth at Whole Foods. But all this does is essentially reset the clock for him as he tries to turn things around. Some, including Lempert, don’t think Mackey has a chance. “What I see happening is that Mackey is out, no matter what his statement said this morning,” Lempert says.

And beneath Mackey, don’t forget about the thousands of Whole Foods employees. While their workplace benefits might not be quite up to the high standard set by warehouse-club retailer Costco, the Whole Foods rank-and-file now has to consider what life will be like under Amazon, which has run into reputation problems in the past over its treatment of workers (paywall). As for employees at Whole Foods corporate, they may be relieved to know that Amazon says Whole Foods’ headquarters will stay in Austin, Texas, where the grocery retailer started in 1978.

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