Amazon buying Whole Foods in bold move into brick and mortar

Amazon is buying Whole Foods in a stunning move that gives it hundreds of stores across the U.S. – a brand-new laboratory for radical retail experiments that could revolutionize the way people buy groceries.

The deal valued at $13.7 billion unites the company that persuaded people to buy books – and then everything else – online with the grocery store chain that fell behind as shoppers found “good enough” alternatives to the organic and natural foods it helped popularize.

Amazon’s stock rose $23.54, or 2.44 percent, to close at $987.71.

Amazon already offers grocery-delivery services in five markets, but the Whole Foods purchase would let it expand to many more. Amazon also offers grocery shipments elsewhere, but that’s tough with perishable foods. Amazon recently announced a second major distribution center in Miami-Dade, where Whole Foods has six groceries. Broward is home to five Whole Markets stores.

The deal could be “transformative,” Moody’s lead retail analyst Charlie O'Shea said, “not just for food retail, but for retail in general.”

Groceries are already a fiercely competitive business, with low-cost rivals like Aldi putting pressure on traditional supermarket chains and another discounter, Lidl, opening its first U.S. stores just this week. Whole Foods itself had launched an offshoot chain named after its “365” private label brand in a nod to the popularity of no-frills chains.

The Amazon-Whole Foods combination could put even more pressure on those chains and other big grocery sellers. Walmart, which has the largest share of the U.S. food market, has been working on lowering prices, while Target has been struggling to turn around its grocery business.

“Dominant players like Walmart, Kroger, Costco, and Target now have to look over their shoulders at the Amazon train coming down the tracks,” O'Shea said.

Online delivery of groceries so far has been tough for any company to pull off because of customers’ concerns about the quality of meat and produce, Wedbush Securities analyst Michael Pachter said. But if customers know that what they are getting is the same as what they’d get at the local store, they are more likely to try it out.

In Florida, grocery delivery programs have been gaining in popularity. Lakeland, Florida-based Publix, said recently that a pilot delivery program in partnership with Instacart had proven so success that it would expand to all its 1,148 stores by 2020. The service is now available in Miami and Fort Lauderdale.

But the Amazon marriage wasn’t enough to sway Terri Merrell, a Coconut Grove resident, who biked to Whole Food in Coral Gables Friday to pick up a bag of jasmine rice.

“I would never do online for groceries, especially Whole Foods,” said Merrell, a self-proclaimed health nut and pescatarian who “quit land animals” 18 years ago. “I like contact and looking at the products face to face,” Merrell said. “The smell, the healthiness — you don’t get that online.”

Jahair Jones, a University of Miami junior and avid Amazon shopper, said he relished the prospect of getting groceries without having to venture into Miami traffic.

An offensive lineman on the UM football team, Jones said he follows a fat-free, low sugar diet that is easier to shop for at Whole Foods than at Publix. When he does go to the store, he already knows which items he wants, he said. It’s simply matter of putting them in the basket.

Pablo Martinez, of Coral Gables, who was grocery shopping with his wife Sandra and his daughter Sofia, thought the acquisition was a long time coming. The Amazon acquisition would likely improve distribution and push down prices, he said.

Still, Martinez said he would continue shopping at Whole Foods in person. “It’s like a walk in the park,” he said. “The colors, the type of quality,”

Whole Foods, which will keep operating stores under its name, said in an email to customers that it will maintain the same standards under Amazon, including bans on artificial flavors and colors and antibiotics in hens producing its eggs.

Pachter said that even if Amazon gets 20 million members of its Prime loyalty program to pay $15 a month extra for AmazonFresh grocery-delivery service, that’s 20 million not going to traditional supermarkets. He added that these are likely the higher-income households who tend to buy more expensive brands and cuts of meat.

“The conventional grocery store should feel threatened and incapable of responding,” Pachter said.

And because customers can buy foods and bulk items like toilet paper from a single retailer, discount retailers such as Costco, Target and Walmart should feel threatened, too.

Walmart has been trying to address some of those online threats, pushing harder into online to build on its strength in its stores and groceries. It announced Friday that it’s buying online men’s clothing retailer Bonobos for $310 million in cash, following a string of online acquisitions including ModCloth and Moosejaw.

Just two years ago, Whole Foods CEO John Mackey predicted disaster for Amazon’s foray into grocery delivery, telling Bloomberg BusinessWeek it would be “Amazon’s Waterloo.”

But Whole Foods has seen its sales slump and in February said it no longer saw the potential for expanding its flagship chain to 1,200 locations, up from about 460 in the United States, Canada and the United Kingdom. It also had announced a board shake-up and cost-cutting plan amid pressure from activist investor Jana Partners.

Amazon, founded by Palmetto High-grad Jeff Bezos, meanwhile, has been expanding its reach in goods, services, entertainment – and groceries. It could have built up its groceries business without acquisitions, said Neil Saunders, managing director of GlobalData Retail, but that would have been costly and time-consuming.

With Whole Foods, Amazon gets an established business that it can transform through its technology and supply network expertise. And it should be able to bring cost-cutting technologies, such as robots to move inventory around, while the company gets a better picture of customers by marrying data from Amazon and Whole Foods’ loyalty programs.

That, in turn, could help Amazon do better with pricing and promotions, branding and the overall store experience, said Robert Hetu, a retail analyst at Gartner.

Mackey will stay as CEO, and the headquarters will stay in Austin, Texas. The deal is expected to close later this year.

Anick Jesdanun reports for the Associated Press. Jennifer Lu writes for the Miami Herald.