When discussing multibillion-dollar acquisitions, experts often toss around dramatic-sounding words like "game-changer" or "disruption" to describe such a deal's potential impact. But in the case of Amazon's (AMZN) planned $13.7 billion acquisition of Whole Foods (WFM), those terms are no exaggeration.
Amazon and Whole Foods combined would become the seventh-largest U.S. food retailer, topping Ahold Delhaize (ADRNY), the Netherlands-based parent company of Stop & Shop and Giant. The deal merges Amazon's food delivery business with Whole Foods 440 physical stores -- and adds even more competitive pressure on incumbent grocers that have lost market share to discounters such as Aldi, Costco (COST) and the dollar stores in recent years.
Wall Street is now expecting even worse times for all those grocers.
Shares of Walmart (WMT), the leading U.S. food retailer, and Kroger (KR), the largest traditional operator of supermarkets, tumbled 5 percent and 10 percent, respectively, in Friday trading. Other players, including SuperValu (SVU), Ahold, Target (TGT) and Costco, also all fell on news of Amazon's Whole Foods acquisition. All told, traditional grocery and related retail stocks lost some $29 billion in stock market value in the hours after the Whole Foods deal was announced.
"This could revolutionize the food retail business," said Greg A. Wank, a partner with Anchin, an advisory and accounting firm that works with supermarkets. He added that the deal will make it harder for the incumbents to maintain their market shares.
About a decade ago, Seattle-based Amazon launched its AmazonFresh grocery delivery service, which is now available in 21 U.S. metropolitan areas as well as Tokyo and London. The company offers customer pickups at certain locations on a test basis. Earlier this year, Amazon unveiled a prototype for a physical food retailer called Amazon Go that will operate without checkout lines.
Up to now, though, Amazon's impact on the $500 billion grocery market has been negligible. GlobalRetail Data pegs its market share at 0.19 percent as of the end of last year. Clearly, CEO Jeff Bezos thinks he'll do better in coming years -- and many experts agree.
The deal for Whole Foods, however, isn't without risks for Amazon. According to Gene Munster, a veteran tech analyst who's now a partner at venture capital firm Loup Ventures, Amazon likely won't earn a profit from the organic grocer for a couple of years. Still, he argues the risk is worth taking and expects Wall Street to give Amazon a "pass" because it's the right thing for the long term.
"There's a large part of consumer spending that the AmazonFresh strategy hadn't tapped into," said Munster. "Amazon isn't thought of as an organic company, but with Whole Foods, they now are an organic food company."
Acquiring Whole Foods also will help Amazon expand its market share with millennials. According to data from market researcher NPD Group, 24 percent of young shoppers bought at least one item from Whole Foods last year, compared with 20 percent of all consumers, a penetration rate the market researcher says is extraordinary for a chain of its size.
Furthermore, most Whole Foods markets are in neighborhoods that are more affluent and younger than America as a whole. And about 60 percent of millennials already are Amazon shoppers. Amazon will retain the Whole Foods brand, and CEO John Mackey will stay in his job.
Austin, Texas-based Whole Foods has struggled mightily recently as its same-store sales (sales at stores open a year or more) have declined for six straight quarters and it felt heat from activist investor Jana Partners to boost its stock price. The organic grocer has tried for years to shed its reputation for products that are unaffordable, even unveiling last year its 365 chain that focuses on low prices.
"The first thing that Amazon is going to do is get the Whole Foods pricing right," said Howard Davidowitz, the head of the retail consulting firm and investment bank Davidowitz & Associates. "This is going to affect Kroger and everybody else. Amazon will price things sharply."
Indeed, shares of Cincinnati-based Kroger, which plummeted 19 percent Thursday after the company slashed its earnings guidance, continued tumbling on Friday. Kroger was thought to be holding its own in an increasingly cutthroat market, but earlier this year it reported its first decline in same-store sales in more than a decade. The figure fell again, by a worse-than-expected 0.2 percent, excluding gasoline, in the most recent quarter.
"If you are Kroger, you're looking down the barrel with this one," said Hugh Tallents, a partner at management consultancy cg42. He said it will have to beef up its digital business rather than look to partner with a larger retailer.
One reason Kroger is hurting stems from the improvements Walmart has made in its grocery business, which accounts for more than half of its annual sales. The retail giant has lowered prices and provided a better product assortment. Earlier this year, Target named former Kroger executive Jeff Burt to overhaul its struggling food retail business. But now, a combined Amazon-Whole Foods will put a tighter squeeze on the two big chains.
Amazon CEO Bezos has famously sacrificed short-term profits for long-term growth, a stance that some Wall Street analysts have condemned for years but investors have bought into wholeheartedly. With Amazon's market capitalization nearly $500 billion and a stock price hovering near $1,000, it shows that a strategy of investing for the long term can pay off.
That's a lesson Amazon's stunned rivals in the grocery business are likely taking to heart right now.