Amazon announced yesterday that it has reached an agreement to buy Whole Foods for $13.7 billion in cash. Here are my thoughts on the implications of the deal:
1. A few days ago, Amazon was rumored to be interested in buying enterprise messaging platform Slack for $9 billion. The alternative for Slack is a $500M funding round at a $5 billion post-money valuation. Independent of which path Slack takes, the fact that a single company is in a position to realistically bid for a grocery chain and an enterprise messaging platform in the same week shows the extent of Amazon’s past ambitions and current cross-market dominance.
2. Amazon is paying $13.7 billion in cash for Whole Foods. This is 64% of the $21.5 billion of cash on Amazon’s balance sheet as of the most recent quarter. Amazon has recently been eeking out small profit margins thanks in large part to the financial performance of Amazon Web Services. In addition, the deal will likely attract debt financing without much difficulty given Amazon’s size and the health of its businesses. However, this is a very large transaction, even for Amazon. In fact, it’s the company’s largest acquisition to date, considerably ahead of its second largest acquisition to date of Twitch for $970M. This signals the importance of the move.
3. Amazon’s move is consistent with the omni-channel strategy that it has recently begun rolling out, for example by opening physical bookstores to complement its core e-commerce book sales. As fairly commoditized products, both groceries and books are categories where the benefits of physical stores are lower than those for non-commoditized product categories like furniture and clothing. However, after an e-commerce company acquires its initial online native customers, physical stores remain an essential part of growing the business due to the fact that the majority of customers in product categories like groceries still shop offline. There will come a day when this is no longer the case, but we’re not there yet. The end game is different than the approach necessary to get to the end game and Amazon’s move shows that it acknowledges the latter fact.
4. Whole Foods’ premium customers are a great match for the Amazon Prime subscription service as both customer groups are high spenders. Adding Whole Foods deliveries to Amazon Prime will make the latter service much more valuable to existing and new customers, while Whole Foods locations will help expose the supermarket’s high spending customers who don’t use Prime to the service.
5. Amazon’s logistics capabilities make it likely that it will take over Whole Foods deliveries from Whole Foods’ existing delivery partner Instacart. I don’t know what fraction of Instacart deliveries are from Whole Foods, but Whole Foods is the grocery chain that is said to have had the biggest contribution to Instacart’s early traction. This is why Whole Foods invested an estimated $36 million in Instacart. Instacart currently faces the real risk of losing one of its biggest partners, if not the biggest.
6. Whole Foods’ more than 460 locations across the US and Canada will serve as a great testing ground for, and enable the mainstream rollout of, Amazon Go checkout technology. This will further improve Whole Foods’ premium customer experience.
7. Since Whole Foods only operates in the US and Canada, companies that face the risk of being displaced by Amazon making similar moves in other countries have the opportunity to prepare their defenses and preempt these moves. These companies include horizontal e-commerce players, offline grocers, and logistics companies. Given the scale and scope of Amazon’s ambitions and demonstrated execution, it’s likely that what these companies don’t do, Amazon eventually will.