Moneycontrol
Jun 19, 2017 01:54 PM IST | Source: Moneycontrol.com

Why Amazon acquired Whole Foods for about USD 14 billion?

The acquisition will help Amazon make a template for offline-online synergy which it could replicate in its key markets.

Why Amazon acquired Whole Foods for about USD 14 billion?

Joseph Sebastian

Moneycontrol News

E-commerce and cloud computing giant Amazon will be shelling out USD 13.7 billion to buy American supermarket chain Whole Foods Markets making it its largest ever acquisition, the company announced last week.

This deal far surpasses Amazon's previous and largest acquisition - the takeover of e-commerce company Zappos for USD 1.2 billion in 2009. This Amazon's second big buyout this year. In March, this year Amazon acquired Dubai-based Souq, the largest e-commerce site in the Arab world for about USD 425 million.

The Whole Foods acquisition signifies Amazon's intent to disrupt the America grocery business. The company has already disrupted offline retail in various categories.

Amazon started its experiment with brick and mortar stores when it opened a store in Seattle called Amazon Books in November 2015.

A year and a month later, Amazon introduced its version of a friction-less physical shopping experience called Amazon Go which leveraged technology and AI to make waiting in queues redundant.

Grocery - A huge market waiting to be disrupted: Grocery is a huge market in the US. Sales worth USD 600 billion were recorded in 2015. According to World Economic Forum, Americans spend 6.4 percent of their household income on food.

With an online linkage, Amazon could easily disrupt the market as well as strengthen it category base. It is also expected that Amazon could shave off a few margins from the Whole Foods business to offer cheaper groceries and disrupt the market.

Revenue gain for Amazon, more consumer base: For a company worth USD 13.7 billion, Whole Foods' revenue in its last fiscal year ending Q3 '16 was USD 15.7 billion. On the other hand, Amazon raked in USD 136 billion in revenue in 2016. By buying Whole Foods, Amazon's revenue will get a bump up.

Although grocery industry is a USD 600 billion industry, only 2 percent of the annual sales are estimated to be made online. However, more and more consumers are becoming less vary of buying fresh food online, with millennials leading the change.

Sudden gain of brick mortar presence across the US: With the acquisition of Whole Foods Market, Amazon can bypass the tough grind of searching for suitable locations for its brick and mortar project.

The upmarket supermarket chain has about 460 stores in plummy urban locations across 43 states in the U.S.

All it now needs to do is overhaul these stores with the Amazon Go technology it has been testing for months and improve upon Whole Foods business model.

Deal could benefit Amazon's own logistics: Whole Foods Market warehouses could also double up as fulfillment centres for Amazon. The Whole Foods can make Amazon run its grocery delivery service, Amazon Fresh, more seamlessly.

Groceries would also bring a stickiness to the Amazon brand and the customer is likely to shop more stuff from the retailer. WholeFoods stores could also serve as pickup points for easier transportation of Amazon deliveries in neighborhoods.

Brick and Mortar grocery stores are here to stay: When it comes to products like fruits and vegetables, most consumers across the world still like to touch and feel the product they are purchasing, as its directly for consumption.

Delivery models, inventory-based, as well as hyperlocal, are more of a dud than a scud in this category in the US at least. Globally many companies have struggled in the online grocery category, as it involves faster delivery and lesser shelf life.

Tapping such brick and mortar stores is the only logical step if Amazon wants to become a retail giant.

After US, Amazon is apparently looking forward to disrupt the Indian grocery industry too. It is in talks to buy Indian online grocery company Big Basket and reportedly planning launch of an offline store.

The acquisition will help Amazon make a template for offline-online synergy which it could replicate in its key markets.

joseph.sebastian@nw18.com
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