Amazon buys Whole Foods, shakes up retail space

Posted on 06/16/2017 by David Radke


Amazon, one of the world's largest and most valuable companies, announced June 16 its plans to purchase Whole Foods, a successful upscale supermarket chain. In a cash transaction valued at $13.4 billion, it is sure to become known as one of the most ambitious and consequential deals in the modern retail landscape, with ripple effects being felt in the distribution and logistics spheres especially.

On its face, the purchase seemed to benefit both corporations. On the one hand, Amazon is a fast-growing behemoth, looking to expand its reach through several industries, but particularly the competitive grocery store realm. Annual sales at U.S. grocers were estimated to be at least $700 billion in 2016 according to The New York Times. Walmart, also among the world's largest companies, has long dominated this space. But as customers conduct a greater number of transactions online, Walmart has struggled to follow digital demand. In response, Amazon has aggressively stepped up its grocery game, and Whole Foods may give it the infrastructure it needs to truly compete.

Meanwhile, Whole Foods itself has struggled to escape recent stagnation. The retail chain, which focuses on organic products, began a rapid expansion throughout the U.S. and Europe around 2007. But after opening more than 400 locations and bringing on 91,000 employees as of 2016, Whole Foods began to lose its edge. Organic products that were a staple of the supermarket chain became commonplace at almost every grocer, including Walmart. With sluggish overall wage growth possibly to blame, fewer customers appeared willing to pay a premium at Whole Foods like they had before. The corporation was in the midst of a reshuffling of its board of directors in the months before the Amazon bid.

News of the Amazon-Whole Foods deal sent shockwaves through the grocery landscape, as measured by stock values. Walmart, Target and Kroger each saw significant declines in their share prices in the hours after the purchase was announced.

"The Whole Foods acquisition provides them more physical locations," said Mikey Vu, a partner at the consultancy Bain & Company specializing in retail, according to The New York Times. "They're going to be within an hour or 30 minutes of as many people as possible."

Amazon and trucking: a complicated relationship

Amazon is notable for the impact it has had on the infrastructure needed to support a retail giant, including distribution centers and a fleet of delivery vehicles. Since they are primarily an e-commerce retailer, most of Amazon's investments into distribution have focused on reducing the time between when a customer makes a purchase and when the item arrives at their door. As of 2016, according to Bloomberg, Amazon operated 72 distribution centers, with total warehouse space surpassing that of Target and now rivaling Walmart. It has also been building out a retinue of its own delivery trucks and even airplanes. While their delivery fleet still falls short of major players like UPS and FedEx, it is able to hire drivers based on demand, similar to how Uber manages a vast pool of freelance tax drivers.

The effect that Amazon has had on transportation is impossible to ignore. If they could monitor it, truckers today may find more and more of the cargo they carry being sent to or from Amazon or its customers. But at the same time, Amazon wants to compete directly with freight haulers, too, buying up its own fleet and hiring drivers.

In another twist that also helps explain the Whole Foods purchase, Amazon has sought to pivot into brick-and-mortar retail spaces in certain product categories. That's because executives have noted that consumers are still hesitant to make certain purchases online, such as for big-ticket appliances, books and, increasingly, groceries. In many ways, the company has recently developed new features that merge online browsing with in-store trying and buying habits. It's just one more way the retail behemoth wants to expand its dominance of multiple industries.

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