Why Is Amazon Buying Whole Foods (WFM)?

When Amazon.com announced that it will purchase Whole Foods Market Inc (WFM) for $13.7 billion (or $42 per share) earlier this month, WFM stock price jumped from $33 to $42. Not surprisingly this was great news for existing Whole Foods shareholders. But how does this merger help Amazon?

Whole Foods sells healthy, organic products. Most products in the stores can be expensive. Organic pistachios, for examples, sell for $4.99 per 100 grams. That’s easily $20 for a small bag of nuts. That being said, they are the best pistachios I’ve ever eaten so you get what you pay for. And there are more affordable options as well. If you want to grab a quick and healthy lunch, you can buy two slices of freshly baked pizza for $7.00, which is a reasonable price. I remember my first time visiting Whole Foods. I didn’t really know what it was so I had no idea what’s in store. But after going in I quickly understood why the retailer attracts so many yuppies and hipsters. Everything in the store is clean and fresh. Shopping there for me felt like a unique experience.

This acquisition of Whole Foods by Amazon.com is a great deal for both companies. Whole Foods Market Inc has been experiencing decreasing same-store sales year after year. Its stock price (WFM) peaked in 2013 and has been falling every year since. So it needs a larger company to help turn things around.

Amazon has already been experimenting with grocery stores since last year with its Amazon Go project. The idea is consumers can walk into a store, buy the food they want, and leave without lining up or checking out. The in-store scanners and cameras do everything automatically so people can just walk out of the store and get charged the correct amount. It’s a really neat concept, but the service is only in the U.S. for now. Amazon also played around with its Amazon Fresh pickup service. This basically allows consumers to place a grocery order online. Then they can pick it up from a drive-in kiosk in as little as 15 minutes. So far the retailer is testing two locations in Seattle. But only Amazon employees have access to this service for now, but is expected to open to the public in the near future.

By merging with a grocery chain, Amazon (AMZN) can expand its growing grocery business. For example, it may integrate its Amazon Go project to be inside existing Whole Foods locations. It can also transform unused Whole Foods real estate into Amazon warehouses for goods other than food. There was a rumor that Wal-Mart was in talks to buy Whole Foods as well, but as it turns out “Wal-Mart Stores Inc is not actively considering making an offer for Whole Foods Market Inc, a source familiar with the matter told Reuters on Friday.”

Even though both companies are well known names, they still represent only a small slice of the $700 billion U.S. grocery sector. According to CNBC, Wal-Mart controls the largest share of the food and grocery market with roughly 15% of all sales, according to estimates from Global Data Retail. The second biggest player is Kroger with 7% of the total market. Even after Amazon.com and Whole Foods merge, their combined market share will only be 1.4% of all the food sales in the U.S. So as of this time, Wal-Mart should have nothing to worry about. But it should keep an eye on new innovation from its competitors. Whether or the not the merger will be beneficial for consumers still remains to be seen. 

This author owns 10 shares of AMZN but no shares of WFM as of writing this article.