Amazon’s 2017 Acquisition of Whole Foods
Company Details: Acquirer - Amazon
Founded: 1994
Founder: Jeff Bezos
CEO: Andrew R. Jassy
Market Cap: $2.44 Trillion, $460.9 Billion (At the time of the deal)
Amazon.com, INC headquartered in Seattle, Washington, United States is a multinational tech company with a focus on e-commerce, cloud computing, digital streaming, and artificial technology software.
Originally Amazon was created as an online bookstore, before branching out into connecting third-party sellers, taking commission, to customers; launching this platform in 2000 enabled sellers to connect and deal with customers in one centralised location. From there, the company developed ‘seller-central’, a platform allowing sellers to manage their inventory, listings, and orders in one place seamlessly. Amazon provided services to third parties in order to eliminate much of the ‘leg work’ in the process, such as payment processing.
From there Amazon created its ‘Amazon lending’ program; allowing qualified sellers to apply to, and if successful, borrow up to $5 million. This developed and grew the number of users of the platform, helping to rapidly grow Amazon’s online presence in the e-commerce market.
In 2002, Amazon launched ‘Amazon Web Services’ (AWS). This marked a shift in Amazon’s focus from e-commerce selling to providing additional data services in the cloud computing industry (Amazon’s most profitable business). In the beginning AWS focused on providing a range of tools for cloud computing, which was centralised to ‘Amazon SQS’ (simple Queue service). This was a messaging service for online communications, connecting consumers and companies together.
In 2005 Amazon launched arguably its most well-known service, ‘Amazon Prime’. This offered bundled services, using a membership program to grant users access to a variety of tools and services. This membership program has grown rapidly with an estimated subscriber count of over 200 million across 23 countries.
More recently in 2023 Amazon developed and launched its ‘Amazon Bedrock’ service. This is a fully managed service, offering access to a curated selection of Foundation Models (Large Language Models) enabling the generation of various AI applications. One provider of the service, Anthropic, centres its attention on AI safety and research, working towards furthering development in reliable interpretive AI systems for their long-term benefits. Meanwhile AI21 Labs, another provider, focuses on the development of alternative AI systems to enable enterprises to leverage generative AI for industrial development uses.
Overall, Amazon has a clear focus on diversifying the markets in which it operates in. Amazon’s developments in the Cloud Computing industry has been its main profit generating industry, successfully capturing roughly 1/3 of the overall global market the largest in the market. This highlights Amazon’s approach of prioritising future gains and benefits over short-term profit targets.
Company Details: Target - Whole Foods Market, INC.
Founded: 1978
Founder: John MacKay, Renee Lawson
CEO: John MacKay (At the time of the deal), Jason Buechel (Current CEO)
Market Cap: Pre-Acquisition $10.6 Billion, Adjusted to £13.7 Billion post-acquisition
Whole Foods Market, INC is a multi-national supermarket chain headquartered in Austin Texas. It was initially created as a local store selling high quality organic produce from local suppliers; with over 230 ingredients prohibited in their food items and 180 in their beauty and body care products.
The company was founded upon the values of community, favouring quality produce over competitive pricing. The company operated on a decentralised structure allowing store managers autonomy to make individual store decisions, enabling the development of strong relationships with suppliers and the ability to adapt offers to purchase patterns as needed.
Originally, the store was named ‘Safer Way Natural Foods’ and received $45,000 in start-up funding. In 1980 a merger with Clarksville Natural Grocery led to the initial creation of the ‘Whole Foods Market’. The focus on ‘community’ was demonstrated in 1981 when a large storm hit the original store destroying all produce and much of the store infrastructure. Despite this, local staff and community volunteers worked together rebuilding the store in only 28 days.
Through various acquisitions the company continued to expand. In 1989 the company expanded to California, furthering its reach to the West Coast. In 1992 the owners decided to take the company public through an IPO (Initial Public Offering), to generate funds without relinquishing too much influence in the company. This proved to be a huge success, with shares debuting at $2.13 a share, raising approximately $28 million in resources for the company. With the share price investors paid being $17 at the time.
Other noteworthy milestones for the supermarket chain include the launch of wholefoods.com in 1998; the company’s first introduction to the e-commerce world. 2003 then saw the chain achieve America’s first ‘Organic Grocer’ certification by USDA Agricultural Marketing Service, which helped to establish the quality of their produce from trusted sources.
To remain competitive with its store pricing, the company launched ‘365 by Whole Foods Market’, a private label own brand line sold in store. This was their attempt to introduce more affordable produce without sacrificing their trusted quality to appeal to a wider customer base. Whilst regarded as somewhat successful, the prices could only go down so much before the quality of the items would be sacrificed, so its impact was limited.
Whilst Whole Foods has upheld quality in their produce, a stigma of being ‘too expensive’ and ‘out-of-touch’ has arisen. In light of this, with global costs increasing in recent years, the company has struggled to maintain a competitive edge. Supermarket chains like Walmart while selling lower quality goods, have remained competitive in comparison through offering various deals generally at lower prices.
The company has however appeared on the Fortunes ‘100 best companies to work for’ for 20 consecutive years, demonstrating the leadership focus on quality in all areas.
The Acquisition
The deal from a distant view seemed perfect, Amazon would pay $42 per share totalling $13.7 billion; it was Amazon’s largest acquisition at that time. In identifying the intended benefits for Amazon, there seemed to be a theme of the ‘brick and mortar’ business model that they would gain. Amazon’s reputation as an e-commerce company alongside its presence in the online shopping market is undisputed, however its presence in the in-person shopping experience was limited. Acquiring Whole Foods’ 446 already established stores, Amazon gained access to their scale for fulfilment capabilities in place. Whole Foods had already built up a large, loyal customer base, therefore many of the risks involved in starting in a new industry were mitigated, especially the grocery industry which is notoriously inaccessible.
Amazon’s huge online presence in the e-commerce industry, alongside its ‘tech focused’ approach would modernise the Whole Foods structure. Furthermore, Whole Foods had previously been under pressure from its shareholders on account of its NOPAT (net operating profit after tax) dropping by 18% over 18 months leading up to the acquisition. The shareholders consisted of various investment groups and hedge funds such as The Vanguard Group and JANA Partner LLC whose main priorities were revenue, profit and growth. Through joining with a company whose strategies aligned more greatly with the investors focus - future growth and benefits rather than short-term gains – the pressure Whole Foods was under from investors would be relieved.
Furthermore, in the years leading up to the deal in 2017 Whole Foods had seen a decline in its net income. Despite record sales in 2016, its net income decreased by 5%, which was mainly attributed to the rising costs of wages and their perception leading to a reduced sales growth. As a result of being seen as ‘out of date’ and too expensive their sales growth declined drastically. Therefore, this deal allowed them to maintain their value in the market restricting it from further decline.
Legal Contentions
The Federal Trade Commission (FTC) brought a regulatory review in response to the announcement of the deal, due to potential anti-trust issues. These issues stemmed from concerns that the conglomeration would create a monopoly in the market, driving prices up for consumers. The primary review was conducted under Section 7 of the Clayton Antitrust Act 1914; the Act aims to prohibit specific business practices which would lessen competition or create a monopoly in a single market. The 1914 Act supplements the Sherman Act 1890, targeting practices such as price discrimination, exclusive dealing, and acquisitions, with the aim of promoting fair competition to protect consumers.
One area for specific review was the horizontal overlap potentially created; this refers to the situation of two businesses operating in the same market, combining their overall market share, creating fears of potential anti-competitive effects such as increased prices and reduced consumer choice. Upon investigating the parties involved, the overlap was found to be negligible as Whole Foods focus on ‘brick and mortar’ sales, differed from Amazon’s digital focus. The vertical overlap however was of more concern and attracted more focus; referring to two or more companies proving different supply chain functions for a common good or service, increasing their control over the value chain, granting greater cost control Being in different areas of commerce meant that there were fears they would combine resources and push out competitors unable to adapt. This was voiced by Niel Saunders, Managing Director and Retail Analyst at Global Data Retail in ‘This deal is potentially terrifying for other grocers’.
However, due to the Commission’s categorisation of Whole Foods being a general grocery seller, their market share was only found to be 2% and therefore too minimal to be of concern. Market share is calculated as the total sales or revenue generated by the company in a particular industry against that of the entire market, as such 2% was considered minimal. This categorisation gained criticism as many believe it failed to capture Whole Foods niche in the ‘organic grocery’ market. Nonetheless, the reviews were unsuccessful, and the deal was approved.
Private Whole Foods shareholders also filed lawsuits against the company on the grounds of undervaluing the company. Robert Berg, a shareholder who filed suit, claimed that ‘material information’ regarding the company’s operation had been left out of the negotiations, rendering the valuation false and misleading. These issues were thought to be a result of the secrecy clause included in Amazon’s deal proposal, prohibiting either party from discussing the details of negotiations.
In response Whole Foods issued a supplemental proxy disclosure, disclosing all information provided to all parties involved. As a result, the lawsuit was voluntarily dismissed. The vote passed with over 99% in favour, with the purchase price remaining at 42$ per share.
Success
Initially there was an increase in both company’s market caps. From June 15th, 2017, to June 16th ,2017, Whole Foods market cap rose from $10.6 billion to $13.7 billion, whilst Amazon’s rose from $460.9 billion to $472 billion. Therefore, the initial result of the merger announcement was highly positive, most likely due to the public’s perception of its potential.
Many feared the acquisition would lead to a culture shift. Believing Amazon’s centralised structure would erode Whole Foods value of high quality and community engagement, focusing instead on automation and data analytics aiming to reduce prices. However, since the deal approximately 3,000 local brands have been added to the company, a 30% increase from 2017. It seems to have generally stayed true to its core values regarding quality, utilising Amazon’s data tools to identify purchase trends enabling competitive pricing whilst maintaining quality. Additionally, there has been a large increase in private label brands sold in store, allowing Whole Foods to adapt and remain competitive whilst also controlling the quality level of the items sold. By producing and selling their own products they can minimise the production costs by reducing the number of parties involved, this means they are able to maintain the high quality in their products whilst simultaneously reducing the prices to maintain competitiveness.
From a strategic standpoint, Amazon gained 466 new stores in a new industry, granting them the infrastructure to develop further and use their existing software to modernise Whole Foods. Tech changes include, palm scanning checkout, linking the palm scan to a users’ Amazon account, streamlining the checkout experience. They have also implemented the ‘just walk out’ experience in which a shopper simply takes items from the shelves and walks out receiving a bill later for the items taken. Whilst these technology implementations have made the shopping experience more efficient, it has led to issues such as incorrect charges to accounts due to incorrect evaluations by the technology as to what the user purchased. There have also been data protection fears in response to the palm scanning technology, attracting attention from groups such as ‘rage against the machine’, questioning the ways in which Amazon uses and stores a user’s personal data.
Overall, whilst the success is difficult to quantify it would be reasonable to conclude that the deal was mostly successful due to the position it gives Amazon in the physical grocery selling market.