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Amazon Sends Shockwaves Through Food Retail Industry With $13.7 Billion Acquisition

By Daniel Miller – Jun 16, 2017 at 7:11PM

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When Amazon announced Friday that it would buy Whole Foods Market for a 27% premium, it brought the future of the grocery business much closer.

What happened?

Any chance of a normal Friday for those of us interested in, or invested in, the stock market went out the window when Amazon.com Inc. (AMZN -1.57%) announced it would be buying Whole Foods Market Inc. (WFM) for $13.7 billion. The news sent a shiver through companies with even a toe dipped in the food retail industry, and shock waves through the ones most closely involved. As of around 12:40 p.m. EDT, grocery chain operator SUPERVALU Inc. (SVU) was down 12.1%, United Natural Foods Inc. (UNFI 2.48%) was down 9.6%, Kroger (KR -2.08%) was down 11.8%,  Target Corp. (TGT -2.24%) was down 7%, and Sprouts Farmers Markets Inc. (SFM -1.00%) was down 5.3%.

So what

"Amazon is going to deliver. This is the thing they've been missing, an ability to get fresh food closer to people. Whole Foods is everywhere Amazon wants to be in cities where people spend money," wrote Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. "They're going to use Whole Foods as a distribution method to get fresh food to the home."

Tablet showing "Grocery online."

Image source: Getty Images.

Amazon agreed to pay $42 a share for the chain, including debt, which is about a 27% premium to Whole Foods' Thursday closing price. For now, Whole Foods Market will continue to operate stores under its original brand name -- essentially, it's business as usual -- but this certainly has a huge impact on anyone else in the food industry.

It's not a secret that Amazon has been trying to make inroads into groceries for a while with the creation of its Amazon Fresh business. But this represents a huge threat down the road for other brick-and-mortar food retailers, because Amazon knows how to distribute product, has a massive online presence, and now possesses a premium brand chain of food stores.

There are synergies to be had, and my money is on Amazon figuring out how to unlock them in the decades ahead. This will directly impact sales and profits for any food retailer, though those that sell a wider array of nonfood products, such as Target, can expect to be less impacted.

Now what

While a wide range of stocks took hits from today's news -- even in the pharmacy industry, based on the idea that an online drugstore could be next on Amazon's to-do list -- consumer habits aren't going to change overnight. That said, if you believe that the retail food business is going to look much the same in 20 years as it does today, this acquisition is the first step in proving that a fallacy.

One major barrier to transforming this industry overnight is the "last mile" cost of delivering fresh food, but that's declining. And it will only decline further as millennials continue to reside in dense urban areas. Plus, millennials are busy and tech-savvy enough to become a massive target demographic for e-commerce groceries.

One day, young people will gasp at the notion that we didn't always have driverless vehicles that delivered groceries and medicine to our homes at the tap of a button. This morning, the markets sure think we've taken a big step closer to that vision of the future.

John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Whole Foods Market. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$113.00 (-1.57%) $-1.80
Target Corporation Stock Quote
Target Corporation
TGT
$148.39 (-2.24%) $-3.40
The Kroger Co. Stock Quote
The Kroger Co.
KR
$43.75 (-2.08%) $0.93
United Natural Foods, Inc. Stock Quote
United Natural Foods, Inc.
UNFI
$34.37 (2.48%) $0.83
Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.
WFM
SUPERVALU Inc. Stock Quote
SUPERVALU Inc.
SVU
Sprouts Farmers Market, Inc. Stock Quote
Sprouts Farmers Market, Inc.
SFM
$27.75 (-1.00%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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