In a surprise move, Amazon is buying Whole Foods for $13.7 billion, the companies revealed Friday. The $42 a share offer is a 27% premium over the Thursday night closing price for Whole Foods stock and represents a bold action by Jeff Bezos, chairman and CEO of Amazon. He will gain a dominant role in the grocery business.
Whole Foods has been hurt recently by the proliferation of organic food in other grocery stores. This has been Whole Foods' specialty since the company opened its doors in 1978. Currently the company operates 440 stores in the United States, 12 in Canada and 7 in Great Britain. Some Whole Foods stores were recently converted to 365 stores as management tried to revitalize the business by offering organic food at somewhat lower prices.
While John Mackey, CEO of Whole Foods, will remain in charge and the company will stay headquartered in Austin, Texas, I think that Amazon will automate the whole operation, integrate it into its websites and lower prices.
This action by Amazon comes at a time when greater price pressure is coming to bear on the grocery sector, with the German discount chain Lidl opening their first 10 U.S. stores Thursday in Virginia, North Carolina and South Carolina. A total of 20 stores will open this summer. Lidl has announced that it will open 100 stores by mid-year 2018. In Lidl's opening brochures feature very low prices. Here are some examples (per pound): 89 cents for tomatoes on the vine; 10 for $5 Greek yogurt; $2.99 pizza; $2.49 watermelon; $1.29 chicken breasts; 89 cent yellow peaches; $3.49 black angus beef patties; $2.49 pork tenderloin. General merchandise: $5.99 T-shirts, $6.99 BBQ tool set, $19.99 stainless steel toaster etc.
Lidl's German rival Aldi, which operates more than 1,600 stores in the U.S., is countering with a rapid expansion. By 2022 it aims to have 2,500 stores in the U.S. selling quality merchandise at very low prices similarly to Lidl’s offerings. As I've written before, Aldi and Lidl's entry into Great Britain seriously affected the profitability of Tesco, Morrison and Sainsbury markets as well as ASDA subsidiary Walmart.
I think there will be price wars as domestic grocery chains and grocery divisions of Walmart, Target, Costco and Sam’s, Kroger, HEB, Stop & Shop and many others chains who want to defend their turf. Amazon will increase the technological sophistication of Whole Foods and make at-home shopping more interesting at very low prices. Lidl and Aldi will compete with their low price and quality offerings. I would not be surprised if Lidl and Aldi soon launch their own websites in the United States as they have done in other parts of the world. In any case, the customer will be the winner.
