NEW YORK (Reuters Breakingviews) - Amazon.com just bought its way to the top of the food chain. The e-commerce titan is going whole hog for U.S. groceries with the $13.7 billion acquisition of upscale chain Whole Foods Market. Amazon’s comfort with low margins and savvy in logistics make it so fearsome a rival that investors in the sector ran for cover.
A relentless focus on the long-run opportunity of selling practically everything to everyone has been the hallmark of Amazon founder and Chief Executive Jeff Bezos. For most of its history, the nearly half-trillion-dollar company has been run at break-even with its prodigious cash flow plowed back into price reductions, expansion into new areas and investment to ensure faster delivery.
Groceries are therefore a natural target. Americans spend about $800 billion a year on their Cheerios, kale and ground beef, according to Cowen research. It’s also a business whose profitability is notoriously low. Whole Foods, for example, generated a net margin of 3.2 percent last year. That’s astronomical by Amazon’s standards. Its own margin was 1.7 percent.
The deal nevertheless marks some seismic shifts. For one thing, it is Amazon’s biggest acquisition ever by a considerable sum. While Bezos has been tinkering with rolling out bookshops, Whole Foods vastly increases Amazon’s bricks-and-mortar presence with 460 stores. And the deal expands Amazon’s workforce by about a quarter.
In exchange for this strategic deviation, Amazon gets access to a slew of wealthy customers and information about their food-buying habits. Bezos could easily extend the benefits of his company’s popular Prime membership into goods and services at grocery stores, thus giving them additional reason to buy even more from Amazon. It also has been trying to shrink shipping costs. Amazon lost $7 billion subsidizing deliveries last year. Having customers pick up their purchases in Whole Foods stores might help.
There’s a strong sense from investors that Amazon is upending the entire business. Its own market value increased by $15 billion on the news. More significantly, it caused some $30 billion to disappear from Costco, Wal-Mart Stores, Kroger, Supervalu and other grocery vendors. Fears of Amazon’s domination went global, with UK supermarket chains getting hit, too. And it’s possible that delivery startups such as Instacart may be affected. Groceries aren’t a winner-take-all proposition, but Amazon may be about to eat a lot of lunches.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.