In an announcement that sent shock waves through the U.S. grocery business on Friday, Amazon announced plans to acquire Whole Foods for $13.7 billion. The news immediately sent shares of many supermarket retail chains down sharply. Kroger, which had been rumored as a suitor of Whole Foods, saw its share price crater as much as 11 percent before making up most of those losses by the end of Friday. Target and Walmart suffered similar losses, while Costco saw its stock price sink 7 percent and Supervalu’s shares spiraled down over 14 percent.
Shareholders of Whole Foods, however, had a fantastic day, as Amazon’s proposal to buy Whole Foods at $42 a share is a 27 percent premium over last Thursday’s closing price.
With 465 stores nationwide, Whole Foods owns a relatively small slice of the U.S. grocery market. In the health-conscious Los Angeles area, for example, Whole Foods only claims a 3 percent market share, while stores owned by Albertsons and Kroger together have a hold on 40 percent of that market.
Nevertheless, the combination of Whole Foods’ brand reputation, combined with the prowess and technology that has made Amazon an economic power on par with Walmart, will cause plenty of sleepless nights for executives within the largest U.S. grocery companies. The Seattle-based online shopping giant has already been testing technologies that (depending on one’s point of view,) range from practical to creepy. And in scoring Whole Foods, the stores of which are usually located in very central, well-heeled or trendy neighborhoods, Amazon now has a platform to test its various ideas. June 16, 2017 may very well be the date people look back on when the retail sector at large entered one of its most jarring transformations.
Where Amazon could go with its technology is raising plenty of eyebrows. The company has patented a smartphone technology that prevents consumers from online comparison shopping within the walls of a store. In Seattle, Amazon is testing a store that requires no checkout. Shoppers just saunter into the Amazon Go, open an app, and take the items they want. Shortly after exiting the store, Amazon charges that consumer’s account and emails them a receipt.
It is that threat of automation that has some consumers, and many workers, worried. Although part of Whole Foods’ recent financial struggles has resulted from its older and outdated stores, the chain deserves credit for improving the customer experience at supermarkets. Gone are the fluorescent lighting, linoleum and dowdy shelves; Whole Foods nudged many of its competitors to soften the design of their interiors, hand out samples with a smile and revamp these stores into places to meet and dine, not just shop and checkout. But one problem bogging down Whole Foods is that chains such as Walmart and Kroger were adroit at catching up, and their scale allowed them to put a dent in the Austin-based company’s sales figures.
But from P and 14th in Washington, DC, to Houston’s Galleria district to Fig Garden Village in Fresno, Whole Foods’ reputation for having knowledgeable and personable employees has comprised one of its key strengths. And when it comes to labor practices, the company’s CEO, John Mackey, has long been hostile to unions, but working at a Whole Foods is still a decent gig. The company says it offers employees a good wage, competitive benefits and the opportunity to work their way quickly to gaining affordable health care benefits.
So far, Amazon’s founder and CEO, Jeff Bezos, says Whole Foods’ operations will remain unchanged. The chain’s leadership will stay on and the company will continue to operate out of Austin while keeping its current name and branding. Considering Bezos’ track record, such as his acquisition a few years ago of the once struggling, but now soaring Washington Post, Whole Foods could actually improve in several ways.
Critics of Amazon, however, are not feeling optimistic about this multi-billion transaction. To some, the company represents all that is to be feared about automation backed by hundreds of billions in revenues. In a public statement, the Institute of Local Self-Reliance (ILSR), which has long complained about Amazon’s business practices, issued a stern warning about what it says is the company’s monopolistic nature.
“Amazon’s acquisition of Whole Foods raises significant anti-competitive issues that should be deeply concerning to federal antitrust regulators and the public. This deal would allow Amazon to leverage Whole Foods’ 444 U.S. stores in ways that would dramatically amplify Amazon’s online market power,” said Stacy Mitchell, a co-director of ILSR, “and it would give Amazon, which already sells more clothing, books, toys, and consumer electronics than any other retailer, a substantial share of an even bigger consumer goods category, groceries. Regulators should block this acquisition.”
Federal regulators will most likely allow the acquisition to occur, as technically the two companies are not quite true competitors. For a generation, the U.S. government has also allowed far larger deals to close. And historically, the main focus of antitrust laws has been to guarantee that concentrated market share will not result in increased prices for consumers. If the Trump Administration, whose leader and aides have long seen Bezos as an adversary, decides to fight this deal they might gain some traction.
But as Stephen Gandel of Bloomberg has noted, the feds have adopted a formulaic approach to gauging whether a merger or acquisition will move forward or not. Since Whole Foods’ online business is relatively tiny ($100 million), it will be difficult to make a case against this deal. “Broadly defined, Amazon has a large share of the online grocery business, but it is picking off one of its smallest rivals,” concluded Gandel.
Nevertheless, retail, and not just the grocery business, is entering a brave new world. Whether consumers will benefit economically and socially is an open question that will not be answered for several years.
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