Amazon buying Whole Foods in bold move into brick and mortar

In a stunning swoop that gives it hundreds of stores across the United States, Amazon is buying Whole Foods, creating a grocery behemoth that could revolutionize the way people shop for food and perhaps other goods.

The $13,7 billion deal would unite the company that persuaded people to buy books — and then everything else — online with the grocery store chain that's slipped recently as shoppers found cheaper alternatives to the organic and natural foods it helped popularize.


"It is groundbreaking in that it's such a disrupter to so many industries," said Karyl Leggio, a finance professor at Loyola University Maryland, of the deal.

The Seattle-based Internet giant has transformed the way consumers buy books, music, clothing and more, Leggio said.


"The one area they've had the most difficulty on is food," she said.

Amazon already offers grocery-delivery services in five markets, but the Whole Foods purchase would let it expand to many more. Amazon also offers grocery shipments elsewhere, but that's tough with perishable foods.

Amazon has had a significant physical presence in Baltimore since March 2015, when it opened massive distribution and sorting centers on Broening HIghway that employ more than 3,000 workers.

Whole Foods also has expanded in the Baltimore region, where it now operates stores in Harbor East, Mt. Washington, Columbia and Annapolis. A fifth store is planned for the Towson Row development.

Those like many other Whole Foods stores are located in prime, upper-income locations that could bcomee new distribution hubs for online orders of groceries and other products, Leggio said.

The deal could be "transformative," Moody's lead retail analyst Charlie O'Shea said, "not just for food retail, but for retail in general."

Groceries are already a fiercely competitive business, with low-cost rivals such as Aldi putting pressure on traditional supermarket chains and another discounter, Lidl, opening its first U.S. stores just this week and eyeing Maryland as part of a 100-store East Coast expansion.

Whole Foods itself had launched an offshoot chain named after its "365" private label brand in a nod to the popularity of no-frills chains.


The Amazon-Whole Foods combination could put even more pressure on those chains and other big grocery sellers from traditional supermarkets to the mass discounters. Walmart, which has the largest share of the U.S. food market, has been working on lowering prices, while Target has been struggling to turn around its grocery business. Shares of both were off about 5 percent in Friday trading.

"Dominant players like Walmart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks," O'Shea said.

Online delivery of groceries so far has been tough for any company to pull off because of customers' concerns about the quality of meat and produce, said Michael Pachter, a Wedbush Securities analyst. But if customers know that what they are getting is the same as what they'd get at the local store, they are more likely to try it out.

Whole Foods, which will keep operating stores under its name, said in an email to customers, that it will maintain the same standards under Amazon, including bans on artificial flavors and colors and antibiotics in hens producing its eggs.

Shoppers also may see lower prices at Whole Foods, which has been dubbed "Whole Paycheck" over the years for its higher-than-average prices

"With Amazon's buying power and their logistics and warehousing, taking into consideration all of that, I look for Whole Foods to lower prices and offer the door-to-door delivery service that Amazon is known for," said Jeremy Diamond, a director of Diamond Marketing Group, a Baltimore-based food retail consulting firm. "This buyout could benefit Whole Foods in a huge way, bringing back customers that have left as well as gaining new ones.


"They're looked at as the healthy grocer, they have that image and they can still be that," Diamond said.

Pachter said that if Amazon gets 20 million members of its Prime loyalty program to pay $15 a month extra for AmazonFresh grocery-delivery service, that's 20 million people not going to traditional supermarkets. He added that these are likely the higher-income households who tend to buy more expensive brands and cuts of meat.

"The conventional grocery store should feel threatened and incapable of responding," he said.

And because customers can buy foods and bulk items like toilet paper from a single retailer, discount retailers such as Costco, Target and Walmart should feel threatened, too.

Walmart has been trying to address some of those online threats, pushing harder into online to build on its strength in its stores and groceries. It announced Friday that it's buying online men's clothing retailer Bonobos for $310 million in cash, following a string of online acquisitions including ModCloth and Moosejaw.

The Amazon-Whole Foods deal, expected to close later this year, is subject to approvals by shareholders and regulators.


Longtime consumer advocate Ralph Nader suggested the acquisition needs a thorough regulatry review in a statement released by the Institute for Public Accuracy on his behalf.

"With every move of this Goliath, Amazon is inviting a thorough anti-trust investigation by the Department of Justice or the Federal Trade Commission," Nader said. "This company is breaking records for destroying Main Street and hollowing out communities through such mechanisms as predatory pricing, and for many years in the past, avoiding state sales taxes."

Amazon began paying state sales taxes in Maryland after announcing construction of its Baltimore distribution center.

John Mackey

But Whole Foods saw its sales slump and in February said it no longer saw the potential for expanding its flagship chain to 1,200 locations, up from about 460 in the United States, Canada and the United Kingdom.

Once the industry darling, Whole Foods has struggled with falling sales in recent years as competitors caught up, enticing shoppers with natural and organic food offerings, often at lower prices. Last month, the upscale Austin, Texas-based grocer announced a board shake-up and cost-cutting measures.


Amazon, meanwhile, has been expanding its reach in goods, services, entertainment — and groceries. It could have built up its groceries business without acquisitions, said Neil Saunders, managing director of GlobalData Retail, but that would have been costly and time-consuming.

With Whole Foods, Amazon gets an established business that it can transform through its technology and supply network expertise. And it should be able to bring cost-cutting technologies, such as robots to move inventory around, while the company gets a better picture of customers by marrying data from Amazon and Whole Foods' loyalty programs.

That, in turn, could help Amazon do better with pricing and promotions, branding and the overall store experience, said Robert Hetu, a retail analyst at Gartner.

Amazon also has been testing automation technology at a Seattle convenience store that's currently open only to Amazon employees. The store uses sensors to track items as shoppers put them into baskets or return them to the shelf. The shopper's Amazon account gets automatically charged.

Hetu said Amazon isn't likely to bring that to Whole Foods right away but could deploy pieces of it to further cut costs. Both companies said there will be no layoffs, but did not respond to other questions about Amazon's plans for Whole Foods.

Loyola's Leggio sees the Whole Foods purchase as just the beginning of substantial investments in "brick and mortar" retail for the online giant, which could allow customers to pick up and return Amazon purchases at Whole Food sites.


She said she wouldn't rule out future acquisitions by Amazon of other retailers.

The Chicago Tribune contributed to this article.