Amazon's recent announcement that it plans to acquire Whole Foods Market for $13.7 billion in cash is big news not only in the grocery industry but also for retailing in general as the lines between online and brick-and-mortar retailing continue to blur.
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Whole Foods' share of the domestic grocery market is minuscule, so regulatory opposition to the deal is unlikely.
The announcement generated speculation by analysts that Wal-Mart or other chains might try to outbid Amazon for the upscale grocer. But Wal-Mart, the mother of all grocery retailers, with 21.4 percent of the market (about twice that of Kroger, its closest competitor), doesn't need Whole Foods' 431 stores to sell groceries; Wal-Mart has about 10 times as many.
Amazon is a much better fit for Whole Foods, whose culture is oil to Wal-Mart's water. The demographics of shoppers who whip out their smartphones to order an array of consumer products from Amazon and those who observe gluten-free diets are aligned, whereas Wal-Mart is down-market.
This fit bodes well for synergies, though to ship a wide variety of Whole Foods items, Amazon, of course, would have to adapt its model to address perishability issues.
A more accessible scenario is having consumers order Whole Foods' groceries online from a special section of its website and then pick them up at a dedicated part of their local store, just as Wal-Mart is doing through its recent acquisition of online retailer Jet. This click-and-collect model would have appeal for suburban moms and dads who want to bypass the checkout line because they're busy ferrying kids to taekwondo and piano lessons.
The acquisition's announcement wasn't good news for online meal-kit delivery businesses such as HelloFresh and Blue Apron. Shares of Blue Apron have languished since the deal was made public.
Even if "Whole Amazon" succeeds, the future won't be winner take all, given the increasing availability of health-conscious food items at other, lower-price chains.
The pending acquisition may serve as a wake-up call to the domestic mergers and acquisition market, which has been in a near coma after collapsing from the Great Recession. It may set the stage for grocery-chain mergers as pressure on margins continues — the kind of competitive environment in which Amazon CEO Jeff Bezos is quite comfortable as he seeks to rule the world through low margin and high sales volume. Amazon is expected to lower the prices of Whole Foods, which suffers the moniker Whole Paycheck. Such reductions are in order for a market now under attack by two discount German chains: Aldi, an extremely low-price retailer (which carries some healthful products) and Lidl, which just opened stores in America. The two chains, armed to compete on price, apparently aren't daunted by a U.S. grocery retailing market that has too many players, making consolidation inevitable.
The degree to which this acquisition succeeds may depend on whether — and if so, how fast — Amazon can change the behavior of consumers clinging to their habit of shopping in real life. Yet it's easy to underestimate Amazon's potential to do this in a market where it has developed a customer base so strong that millions pay the Amazon Prime fee of $99 a year for two-day shipping at no extra charge.
Given Amazon's overall mission of expanding into new product lines and taking advantage of the synergies involved, acquiring Whole Foods is a natural move and probably a smart one. A few years down the road, the result could be a sea change in the way many Americans shop for groceries at Whole Foods and other chains.
Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry. He does not own shares in the companies mentioned in this column.
Any opinions expressed in this column are solely those of the author.