The $13.7 Billion Dollar Deal
Amazon announced on June 16th, 2017, a $13.7 billion deal to buy Whole Foods. Amazon agreed to pay $42 per share in cash for Whole Foods at roughly 27% premium to the stock price at Thursday’s June 15th close. Mackey under pressure by the board to find an acquirer for the company was able to keep his job while simultaneously giving the stock price a bump. Coincidently the stock price rose 27%, bringing it near the transaction price at which Amazon had bought them.
Amazon’s strategy was evident in that it was looking for a distinct brick-and-mortar presence and struck gold in acquiring Whole Foods at the price it did. Some investors believed this deal was made hastily on the end of Whole Foods where their CEO, John Mackey, described the partnership as “love at first sight” (Alex Morrell Business Insider Magazine).
Amazon buys Whole Foods for $13.7 billion
It’s evident in today’s day and age we are moving more towards e-commerce and ordering goods online; however, that idea has been slow to catch on within the fresh produce and grocery industry. We believe that Amazon is looking to establish itself physically in broader local markets to develop theoretical same-day delivery. Alternatively, better yet, 30, 10, or even 5 minute delivery based on location and operational excellence
Amazon certainly has in spades. This doesn’t bode well for new competitors to Amazon, like Target, Kroger, and Wal-Mart because although people do enjoy physically walking into grocery stores for purchases. The distribution scale of Amazon allows for fresh delivery that most, if not all, competitors do not have an answer for yet. Risks seem to pertain to only Amazon at this point as it is a full 100% acquisition of Whole Foods. Whole Foods’ business has been ailing in recent months, so it will be to Amazon’s challenge to bring the company back to the fold.
The strategy for this deal will involve leaving the current Whole Foods CEO in place to cause minimal disruption over the acquisition. An integral part of the approach will be to understand where the powers of a consolidated supply chain and other potential synergies in both of their operations are. It is imperative to understand their current processes since the business models are different, online retail vs. brick & mortar food retail.
From Amazon’s standpoint, bringing technology to the Whole Foods operations could end up bringing efficiencies in inventory and supply chain management, which can translate into better margins for Whole Foods. The technology investments that Amazon can do to Whole Foods could be the key to the sustainable margins of a brick & mortar retailer moving forward.
Stage I: Deal Creation
Looking at the Amazon-Whole Foods Deal within the chronological framework of the deal-making stages presented we have approached Amazon’s strategic alliance, better yet merger, with Whole Foods by first looking at the “Deal Creation” stage. Within this stage of building out the deal, each firm would like to work together to create and maximize the economic value at stake. Considering the pros and cons of this agreement that would affect the maximization of the financial benefit to be created through merging these two prolific companies. The grocery industry is well-known for having thin margins as can be seen with Whole Foods’ competitors Krogers, Target, and WalMart.
Brick and Mortar Stores
Brick and mortar stores within this industry have half-heartedly or even never pursued strategic technological advances within their businesses to help leverage efficiencies driven from such technology to help increase these margins. Amazon, a worldwide leader in operational efficiency, was the perfect choice for Whole Foods to distance itself from the competition. Leveraging Amazon’s experience and abilities in finding synergies within the workplace for their technologies such as their web services application as well as their online retail space where they’ve mastered the cyber delivery environment are prime examples as to why Amazon was a great strategic partner moving forward.
According to Brittain Ladd, a retail consultant, and a former executive at Amazon, acquiring Whole Foods means Amazon gains the expertise that it lacks on how to run not only a grocery business but also brick-and-mortar stores (San Francisco Chronicle, 7/13/17). This knowledge base and skill comes with Whole Foods CEO John Mackey, who keeps his job at the top of the food chain during this merger.
We believe this is a sound strategy in architecting this deal because not only do you keep the grocery market knowledge within the company that helped pave the way for the brand’s recognition, but you also help mitigate some risk by limiting the amount of knowledge transfer delay as well as isolating the business from other business lines and functional areas within Amazon. We say isolating, because even though this is a merger and Amazon will be integrating its technological infrastructure into Whole Foods, we are assuming the business will still be run by Mackey and the current front office outside of Amazon’s leading e-commerce portfolio in case the company goes under, it won’t affect those lines of business.
One of the cons of this deal that could affect the maximization of the economic value at hand here is Whole Foods’ reputation of the late and recent drop in the share price. The organic food giant has seen some negative press lately in regards to its high costs; however, the ever-loyal fan group that is the Whole Foods shopping customer seems to be staying loyal to their grocer. Perhaps the efficiencies brought forth by Amazon’s operational expertise can help increase margins and thus lower prices to appease these consumers.
Stage II: Financials
In Stage II for the chronology of the Amazon-Whole Foods Deal, parties evaluate the financial landscape and implications of the deal being pursued. Amazon, as the buyer has to make sure that what the company ends up offering as a price per share makes sense with a future value perspective. To frame this stage, Amazon will look at the past, the present, and the future to see what opportunities and difficulties might arise in the case of the Whole Foods acquisition.
The Past – Whole Foods Markets Stock (WFM) @ $65 per share
As recent as 2013, the WFM stock hit its all-time high of $65.24 per share. This all-time high can be attributed in significant part to proper operations and extraordinary revenue growth from its IPO, among other things. This meant that the value of Whole Foods Markets back in 2013 was nearly $20 billion. Fast forward to Amazon offering $42/per share, and this would be valuing the company around $13.4 billion (with 319 million outstanding shares). There is room for opportunity. In September 2016, Whole Foods Markets posted revenue of $15.7 billion and $857 million in operating income. Amazon would be purchasing Whole Foods Markets at 0.85 times price over sales, and 15.6 times expenditure over its operating income. In several years, this is going to look like an incredible steal. (Galileo Russell – Seeking Alpha).
The Present – Whole Foods Total Revenue and Growth
In the past couple of years, active investors such as Jana Partners and money manager Neuberger Berman have been pushing Whole Foods Markets to sell itself or perhaps merge with another grocer. These active investors are attributing the slow growth of the past couple of years in revenue on poor operational performance on behalf of Whole Foods (Sarah Whitten – CNBC). It is not news that Whole Foods has been struggling with growing revenue year over year, but this is an issue that has been attacking the brick and mortars retailers everywhere. This is where Amazon opportunity comes in as leaders in supply-chain retail management operations. Add to that, [Amazon] being guru’s in customer experience will most likely entail understanding Whole Foods customers in a way that Whole Foods has never been able to do before. The financial value that comes from understanding the current customer base at a more detailed level can be valued in potentially millions of dollars in sales that are currently not being made.
The Future – Synergies
The estimated future synergies that can come from this deal would be difficult to calculate, but at the moment we can see cost reductions in supply chain and other efficiencies to be in the ballpark of millions of dollars. This, at the same time, will help soften the low marginal costs of brick and mortar retail and will evolve into the future of food retailing. There is an aspect of the deal that has caught some attention: DATA.
According to data scientists, Amazon might be looking to integrate their customer data, whole foods customer data and Amazon’s Echo customer data to design shopping list that caters to the needs of the customer. The ability for Amazon and Whole Foods to know what you need and when you need it will be the next step in re-inventing the food retail model and bringing it to the forefront of technology and personalized customer experience.
Estimating impact of synergies
It will be challenging to estimate how much can synergies like this can mean in terms of revenue because changing the customer’s shopping experience is not an easy thing to do. That being said, these changes are happening, whether in five or ten years, but it’s happening. As we are sure, Amazon will be there waiting to cash out on what could be considered a significant acquisition of incredible value at what would be then, a “steal” as a price. The most considerable synergy this deal has as financial value for both companies is the expertise that each other lacks, which each other can help by adding value (experience) to it. Amazon has been testing models to establish what can be the future of brick and mortar stores. Now, Amazon is not a brick and mortar model. They are a technology company.
On the other hand, Whole Foods has the experience of brick and mortar, but they lack technical expertise. It was not until mid-2016 that Whole Foods made the decision to get rid of old legacy systems and implementing a new core cloud system focusing on data. Amazon has a more significant risk in this purchase, but they are buying expertise that Whole Foods possess. The beauty of the financial aspect of this deal is that the monetary value goes both ways.
Stage III: Design
Stage three of the deal-making chronology is the “Design” phase which raises the question of what form should the deal take, the risks involved, and who absorbs those risks. This particular deal was created to help Amazon expand its reach in grocery as well as brick and mortar store environments. Also, it took the form that would allow Whole Foods to be more competitive within the industry and further the company’s mission as being the leading provider in organic goods. Seeing this deal as a merger, we can assume Amazon is taking on most to all of the risks as they are purchasing Whole Foods outright.
Historically, stores within this industry do not take very many risks in their business cultures with enhancements in technology and operations such as the one Whole Foods is attempting (San Francisco Chronicle). In most cases, these types of deals are more reactionary due to economic or competitive pressures. This deal is taking form more based on a proactive look at the future of the business and how to leverage each advantageous strength of the parties involved.
Stage IV: Developing the Contract
One of the biggest things Whole Foods is promising to provide Amazon with is their leverage of the local food customer network. Whole Foods has a vast amount of customer base built up already, and physical stores around the nation in prime locations will provide Amazon the ability to start earning money right away. Other assets that Whole Foods is promising Amazon are its relationships with local and nationwide suppliers, its national distribution, fulfillment centers that are optimized for Whole Foods products. Amazon will also be able to leverage the already in place online shopping option for Whole Foods customers, which will provide Amazon with customer shopping habits and this data, in turn, can be used to help attract more consumers to Amazon’s website.
Brand equity is another essential part of this deal because it provides Amazon access to customers of Whole Foods, who are in upper-middle and upper-class consumers. Since Whole Foods does not compete on price similar to Amazon and instead focuses on customer service and providing accurate, descriptive products, both companies will not have issues merging and cultures of both companies will gel well together. This merger will benefit both parties and allow Amazon to reach out to customers nationwide. With the use of Amazon Prime and its new instant checkout technology, it will be able to provide instant one-day deliveries. Overall this merger will allow both companies to work together and create even stronger leverages and increase buying power. This in turn will enable Whole Foods to reduce many of the prices on its core products and help it become more competitive.
Stage V: Performance
Going forward, Amazon will integrate technology and online accessibility for its Whole Foods stores but does not plan to change the culture of the brand itself radically. This is very clear from the decision to retain the previous CEO. We think this is a smart decision as Amazon does not have the experience that Whole Foods has in the grocery business. It looks a lot like a decision from about ten years ago when Disney bought Pixar but did not intervene much in the company’s culture as to not affect productivity and quality.
Amazon recognizes that Whole Foods can be profitable on its own, but some synergies are undeniable, and that can have an advantage. Whole Foods has a vast customer base nationwide, and the brand is stable in itself, and Amazon will try to use that customer base for possible Amazon Prime subscriptions. This way, customers can use Prime as a one-stop-shop.
Furthermore management will be interested in all the data Whole Foods has collected over the years Amazon which they will utilize for possible synergies with AmazonFresh (grocery delivery program) and Amazon Go, a new idea from Amazon for brick and mortar grocery store where advanced technology will allow for virtually no checkouts and no waiting in line after you are done shopping. This is a big bet from Amazon as they are venturing in a market they don’t have much experience in but it seems that Amazon believes that a smooth integration of the two markets is possible and if
Amazon is as successful in integrating Whole Foods into their business as they have shown to be, then the future seems very bleak for competitors. Not only grocery chains but also other retailers might not have a future if this merger is successful as Amazon is known to be able to compete with anyone in prices and for the low margins of the grocery and retail market that might mean a very unsure future.
If you are interested in further business readings (and if you are in for a deep dive into an operational analysis), check out: VivaColombia Airline’s Operational Analysis!
Rivera Pecunia, Gustavo. “A Five Stage Approach to Deal Making – Amazon Buys Whole Foods.” Pecunia Group, Pecunia Group, 10 Sept. 2019, https://pecuniagroup.com/5-stage-approach-deal-making-amazon-whole-foods-deal/.
😄 #TechDisruptor 🚀
Hi there! I’m a Full Stack Developer and Project Manager with experience in delivering creative and effective solutions across healthcare, higher education, nonprofits, and other industries. I’m very passionate about transforming operations with technology and challenging standard practices. My strategy tends to focus is on people interactions, how we learn, perform, and communicate.