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Amazon.com Inc. (NASDAQ:AMZNC) has hinted it wants to get into the grocery business in a big way.

It’s no longer a hint. It’s a full-blown announcement coupled with news the giant internet retailer plans to buy organic grocer Whole Foods Market (:WFMN/A) for $13.7 billion.

Amazon will pay a 27% premium for Whole Foods or $42 a share. This is the largest deal in Amazon’s history and expected to close in the second half of this year.


Brick-And-Mortar For Real

Amazon’s recent testing of its AmazonFresh Pick Up brick-and-mortar locations in Seattle is apparently just the tip of the grocery iceberg, valued at more than $600 billion, and Amazon clearly wants a bigger bite.

With 450 locations in 42 states, Whole Foods has a physical footprint that could eventually grow to Wal-Mart Stores Inc. (NYSE:WMTB) like proportions, although nobody is suggesting that just yet. What some are suggesting is that Amazon could use Whole Foods stores to market more than groceries, specifically electronic products including book readers, tablets and media streaming devices.

Overcoming Online Objections

When it comes to groceries, online retailers have had a problem appealing to consumers who want to pick their own fresh produce. The Whole Foods acquisition could put Amazon closer to people in their homes and help overcome that obstacle.

Otherwise, the move by Amazon seems like a mismatch. Amazon is known for low prices. Whole Foods is more of a premium leader. Still, strong brand loyalty and the network of physical locations could be the main draw for Amazon.

Competition Reacts

Amazon’s move let the air out of the stocks of its grocery competitors. Kroger Co. (NYSE:KRC) shares fell 14%, Target Corp. (NYSE:TGTB) shares dropped 12%, Supervalu Inc. (NYSE:SVUF) shares fell 19%, Costco Wholesale Corp. (NASDAQ:COSTB) shares fell off 6.2% and Wal-Mart shares dropped 5.8%.

This is news the grocery industry didn’t need. Competition, price wars, discounters like Aldi and more customers already shopping online for many products have eaten into traditional grocery store profits in a big way.


Case In Point - Kroger

The potential impact of the entry of Amazon into groceries, let along the acquisition of Whole Foods Market adds insult to injury for chains like Kroger. The company already revealed recently that the “upheaval” in the food retailing industry meant the company expected fiscal year earnings to be 9% lower than originally forecast.

Cash drains will likely go to higher wages, more hours in service departments, investment in digital and additional price cuts in an arena that already has thin margins. In a nutshell Kroger is deciding to defend market share over earnings. As Loop Capital analyst, Andrew Wolf told Supermarket News, “In a competitive market, it’s hard to do both.”

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