Why Amazon wants to spend £10bn on a 450-strong supermarket chain

The retail behemoth is getting into bricks-and-mortar in a big way with plans to acquire Whole Foods Market.

by Jack Torrance
Last Updated: 16 Jun 2017

Tesco’s jubilation didn’t last long. Shares in Britain’s biggest retailer opened 3% up this morning after it recorded some of its best results in years, with like-for-like sales up 2.3% in the 13 weeks to 27 May. But the gains were reversed (and then some) after the shock news that Amazon plans to acquire Whole Foods Market, the upmarket grocery chain with more than 450 stores, including nine in the UK.

While it’s not a big competitor of Tesco, whose shoppers are more interested in two for £5 ready meals than Whole Foods’ spelt flour and macadamia butter, it’s yet another sign of Amazon’s determination to crack the food retail market. Tesco’s shares were down 3.8% at time of writing, with Sainsbury’s down 3.2%, while online supermarket Ocado took a 2.3% hit.

It’s a bold and unprecedented move from Amazon, which plans to spend $13.7bn (£10.7bn - or $32m per store) on the acquisition. It’s long been speculated whether the retailer could expand its physical presence, especially after it opened a bricks and mortar book shop in 2015. But the two brands seem like an unusual fit – Whole Foods’ ethical, boho, organic image stands out against Amazon’s ruthless, bargain basement simplicity.

There are no plans to fold the supermarket business into its new mothership and the Whole Foods brand will remain distinct – for the time being at least. The deal is Amazon’s biggest ever by some stretch, the previous largest being its $970m takeover of the videogaming platform Twitch. But when your market cap is just shy of half a trillion, $13.7bn is hardly going to break the bank.

Amazon’s announcement gave few hints at the rationale for the acquisition – the canned quote from CEO Jeff Bezos provided nothing but praise for Whole Foods, which ‘has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue.’

The deal could be a tacit admission that physical stores are a fundamental necessity for a large grocery business. Online food shopping has remained a small part of the overall market because it’s difficult (and expensive) logistically, and because its often more convenient to pop down to the Tesco Metro down the road than to wait a few days for the Ocado driver to show up. Having a physical presence would also allow Amazon to offer click-and-collect for its non-food products.

But even if Bezos doesn’t plan to turn Whole Foods into a massive global grocery chain with thousands upon thousands of stores, there’s other value to be had. Building a food supply chain isn’t something you can do overnight, even with Amazon’s magic money tree, but buying one is a different matter.

Then there’s the supermarket chain’s distribution network, its refrigerated lorries and specialised warehouses (and the systems that control them), which could be used for online retail too. Plus it's an opportunity to coax more of Whole Foods' monied shoppers to join Amazon's Prime membership scheme - 'Have a free bottle of wheatgrass juice when you sign up in store today'. 

Regardless of which direction Amazon plans to take Whole Foods in, today is likely to be an unhappy day for supermarket bosses the world over, who are facing up to the prospect of competing with one of the most powerful and determined businesses in history.

Image source: Jared Preston/Flickr

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