Amazon (AMZN) is expected to close its $13.7 billion acquisition of Whole Foods Market today.
Last Thursday, Amazon said it will lower prices starting today. Grocery stocks tumbled in response. Wal-Mart (WMT), Target (TGT), Costco (COST), Kroger (KR), Supervalu (SVU), and Sprouts Farmers Market (SFM) all got hit on news that the most fearsome competitor in technology and e-commerce is now squarely focused on the grocery business as well. These stocks also got hit the day that the deal was announced in mid-June. The grocery business was already highly competitive and we all know that Amazon will choose market share over profits to expand its reach.
Whole Foods has struggled with sagging sales as its high-quality produce was too expensive for many shoppers. Lower prices from Amazon will entice customers and should boost traffic and sales near term.
Amazon's purchase of Whole Foods at < 11x EV/EBITDA may not be on the same level as Google's purchase of YouTube for $1.65 bln in 2006 or Facebook's purchase of Instagram for $1 bln in 2012, because software that monetizes user-generated content creates a lot more operating leverage (incremental profit) than a low-margin grocery business. Still, the WFM acquisition does seem like a very savvy strategic move to further the company's penetration in local markets.
Amazon will leverage the Whole Foods assets like no one else can. Amazon and Whole Foods Market technology teams will begin to integrate Amazon Prime into the Whole Foods Market point-of-sale system, and when this work is complete, Prime members will receive special savings and in-store benefits. The two companies will invest in additional areas over time, including in merchandising and logistics, to enable lower prices for Whole Foods Market customers. Amazon Lockers will also be available in select Whole Foods Market stores.
Amazon is all about attracting people to its ecosystem and increasing Prime membership and this deal allows Amazon to offer even more value in its subscription service.