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Amazon's $14 Billion Whole Foods Bet

Written by Alexandra Perry
Posted June 19, 2017 at 6:16PM

In a way, it's the perfect marriage: Amazon and Whole Foods, together at last.

Amazon scooped up Whole Foods on Friday for close to $14 billion. This marks the e-commerce giant's biggest acquisition to date.

For Whole Foods stockholders, it was phenomenal news.

Whole Foods has been locked in a downward spiral since 2012, and this acquisition sent the stock's value flying by over 30%.

On the flipside, Amazon's stock also increased by 3% — a rare event for the acquiring company.

And that wasn't the only thing out of the ordinary.

Amazon's move had a tremendous impact on the rest of the grocery sector. Most major grocery store stocks — Kroger, Wal-mart, Target — dropped by 6% after Amazon's announcement.

It's clear other grocery investors are wary of powerhouse Amazon hurtling into the space like a comet. I can't say I blame them.

If Amazon utilizes its $14 billion purchase well, it can disrupt the entire grocery industry.

But for now, let's regard this purchase as an attempt to secure Amazon's position rather than advance it. This needed to happen to save the weakest link in Amazon's empire: AmazonFresh. 

AmazonFresh Is Amazon's Achilles' Heel

At the end of the day, despite all its clout and flashy marketing, Amazon is a company that capitalizes on human laziness.

Every new service that Amazon churns out allows its customers to stay on the couch and reach for the computer.

This approach works. In the last few years, Amazon's Prime service has done exceedingly well. The company expanded its streaming efforts and even got permission to stream top games from the NFL.

It was these efforts that allowed Amazon to breach the $1,000 mark before rival Google.

But, despite all this progress, one Amazon service still struggles: AmazonFresh, the e-commerce giant's grocery division.

A detailed research report highlights multiple problems with the service, which includes poorly trained employees and excessive food waste. Amazon can't seem to convince people to buy groceries the same way that they buy tablets or books.

And that is where Whole Foods comes in.

Amazon Is Cornering the Online Grocery Market

Whole Foods gives Amazon access to prime real estate in affluent neighborhoods. These spaces could act as a hub for grocery and product distribution. And Whole Foods has an existing grocery model, which Amazon can use to improve AmazonFresh and reduce waste.

There's been speculation that Amazon Prime users may be able to use their memberships like Costco cards at Whole Foods locations. This alone will provide major incentive to purchase Amazon's premium service.

Once you consider all of this, that $14 billion was probably some of the easiest money Amazon has ever spent. Whole Foods secures Amazon's online empire and protects their grocery department.

It also furthers the company's long-term goals of supplying the "smart home"

When Our Groceries Come in Boxes

 For a long time, analysts have argued about whether Amazon is overvalued as a company. As a retail company, it certainly is.

But does anyone really believe that Amazon is just a "retail company"?

Amazon has created its own space in the smart home market. The smart home market will be worth an estimated 121.3 billion by 2020. And Amazon already owns a huge stake in it.

Amazon's personal assistant, Alexa, makes up 77% of the microphone-assisted speaker market. Alexa could potentially run the inner workings of your home, taking orders and diligently ordering Amazon's products. Now, because of Whole Foods, that list of items includes groceries.

We're heading toward exciting times. Investors will have to watch to see exactly how Amazon uses Whole Foods as the news settles. If you liked this article, feel free to sign up below for more updates. 

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