In the following case study, we analyze the merger of Amazon and Whole Foods as an example of how two very different businesses can come together to add value to their respective companies:
- Mergers are about creating synergies in order to generate value for the companies involved.
- In this case, Amazon was interested in expanding its grocery business; specifically, learning the business and understanding how consumers behave in order to convert them into online grocery consumers.
- Amazon had been expanding into groceries and physical locations, including bookstores, ironically entering the brick-and-mortar business that it has also disrupted.
- Whole Foods, meanwhile, offered the biggest name in the gourmet grocery niche and a fleet of prime urban locations; however, its stock price had been consistently decreasing as revenue growth had fallen every year since 2012. Investors had been pushing the company to sell itself to a larger grocer.
- In summary, Amazon needed food and urban real estate, and Whole Foods needed help.
- Amazon saw the opportunity to purchase Whole Foods to achieve its objective of expanding its grocery business, but also, to use Whole Foods locations to double as Amazon warehouses.
- Amazon acquired Whole Foods for $13.7 billion, the retailer’s largest acquisition ever. With 460 newly acquired locations, the company continued to expand.
- Now, Amazon has a distribution center and a company that has contracts in place for local, organic produce. Instead of contracting with other companies that do something similar so that it can sell the products online, it owns the distribution channel to do that itself. This is expected to significantly reduce the transaction costs, drive down prices, and increase margins for these products.
- Ultimately, the synergy created by the deal will be a great benefit to Amazon.
– For Amazon:
- The company can sell just about anything, essentially becoming an “everything online store.”
- It gained market power
- It gained access to around 460 prime urban locations, which can double as distribution/warehouse hubs.
- Its Prime business was directly benefited by being able to deliver groceries and other products in just a couple of hours to its members, while having total control of the chain of delivery.
– For Whole Foods:
- Financial strength gained after being purchased by Amazon
- There is now in-store Prime branding and discounts, and the company has expanded its online capabilities. Using Prime Now, customers can receive grocery orders in as little as two hours, depending on the market.
- Whole Foods Market added over 7,500 new local items from 1,900 new and existing suppliers in 2018.
- Integration between companies is always challenging.
- For example, since the acquisition, Whole Foods has been facing food shortages at some stores, which was due to a new order-to-shelf inventory management system. In this system, store associates often skip the stock room and bring items directly from delivery trucks to the shelves. The positive aspect is that it has caused less spoilage in stock rooms, reduced costs, and allowed associates to be more customer facing. However, the result has also been empty shelves, angry customers, and discouraged employees.
- Integration is a work in progress; nonetheless, the merger has already impacted the grocery industry, by driving competitors to offer grocery deliveries for reduced prices at a faster pace. Ultimately, benefiting the consumer.
*Author: Elia Naranjo: BLP Senior Associate. She specializes in the practice of Business Law with emphasis in M&A. She has advised national and international clients in mergers and acquisitions, purchase and sale transactions, due diligence processes, corporate restructuring and governance, the review, preparation and implementation of contracts, and in day to day legal issues of a commercial nature. Elia has been involved in transactions in a wide range of industries including telecommunications, transportation, manufacturing, retail, and hospitality.