By Randyl Drummer

June 20, 2017

In its first large-scale push into brick-and-mortar retail, Amazon (Nasdaq: AMZN) announced this morning it has agreed to buy Whole Foods Market, Inc. (Nasdaq:WFM) in an all-cash merger transaction valued at $13.7 billion.


The historic pairing, together with today’s announcement by retail giant Wal-Mart Stores, Inc. that it will buy Bonobos, Inc., a New York-based men’s clothing retailer that does most of its business online, casts a spotlight on the seismic changes reshaping the way we buy goods and services.

The transactions show the increasing acknowledgement of the interdependence and symbiosis of e-commerce and physical retail. They also underscore the heated competition between the nation’s retail titans, Amazon and Wal-Mart, as well as Amazon’s acknowledgement that establishing a presence in strong retail locations, at least in the grocery sector, may be necessary to take the fight to its brick-and-mortar rivals across multiple retail sectors.

In the short term, legacy chains like Albertsons, Kroger, Safeway, Winn Dixie and others will likely respond to the Amazon challenge by investing in upgrades to their stores to retain traditional grocer shoppers, according to Isaac Marcushamer, partner in the business reorganization practice group at Berger Singerman law firm in Miami.

“I think we’re about to see a wave of investment in the legacy grocery space, triggered by Amazon, as they try to differentiate themselves,” Marcushamer said. “In the short term these upgrades it will be pretty good for grocery center landlords. But longer term, as we’ve seen whenever Amazon enters a line of business, its superior supply chains will make a real difference.”

While the Amazon/Whole Foods pairing “won’t be a cataclysmic overnight event,” any investor banking on the certainty of past performance for future returns is mistaken, Marcushamer said.

“Landlords have to be thinking about what will happen when their tenant mix changes, and change is always scary for a landlord,” he said. “Landlords must embrace change and think about the long term while they’re still ahead of the curve and in a position to reposition their assets, as opposed to scrambling 18 month or 36 months from now when they have this oh-my-god moment.”

Alexander Goldfarb, REIT analyst with Sandler O’Neill, said that Kite Realty Trust executives noted during a meeting earlier this week that one of the biggest pushbacks they heard upon going public in 2004 was that “every grocery store was going to be put out of business due to Super Walmart.”

“Clearly, this turned out to be a fallacy and, though four of the original top 10 tenants went out of business, Kite Realty’s portfolio is 95% occupied today,” Goldfarb said in a research note.

Under the definitive agreement, Amazon will pay $42 per share to shareholders of Whole Foods, which has struggled financially in recent quarters, a 27% premium over its Thursday closing price. The transaction is expected to close in the third or fourth quarter.

Amazon last year appeared to be gearing up for a major push into bookstores and other physical retail, but defying the predictions of some analysts, has not announced a major roll out to date. The ambitious move into the grocery store space would give Amazon control of the 460 locations in the U.S., Canada and United Kingdom operated by Austin-based Whole Foods, which employs 87,000 people and reported $16 billion in revenue for 2016.

‘Shot Heard Round the World’

The announcements were greeted with plenty of commentary by analysts in both the retail and real estate industries.


Citi REIT equity analyst Michael Bilerman described the move as a validation of the enduring power of high-quality, well-located retail real estate.

Bilerman said the deal is further evidence that online retailers appreciate the power that a brick-and-mortar presence can have as online retailers increasingly struggle with the costs and logistics of both last-mile delivery to shoppers as well as merchandise returns and exchanges.

“All of this is consistent with our views that high-quality, well-located retail real estate will continue to win out even with continued growth in e-commerce,” Bilerman said.

Morgan Stanley & Co. retail analyst Simeon Gutman noted that while Amazon was expected to plow into the physical grocery store space, including reports that it was interested in opening 2,000 Amazon Fresh grocery stores in the U.S. over 10 years, “we did not know in what form or when.”

“In thinking about other brick-and-mortar categories, food retail makes sense for Amazon to go deeper, given the high frequency of purchases and unique method of distribution,” Gutman said, who described the deal as the “shot heard round the world.” “Besides auto parts and potentially beauty retail, we do not think there are other categories that are so distinct that Amazon would be interested in pursuing brick and mortar locations.”

While was fairly well known that Amazon had planned to pursue a more aggressive brick-and-mortar strategy, the small number of bookstore openings so far have been limited to high-traffic street retail locations, added Bilerman.

“Clearly, Amazon has chosen to buy instead of build, and in choosing a grocer, the retailer is inheriting some very well-located stores,” Bilerman added.

Under the agreement, John Mackey would remain CEO of Whole Foods, founded in 1978, and the grocer would continue to operate under its existing brand and maintain its headquarters in Austin.

The partnership is an opportunity to maximize value for Whole Foods shareholders, many of which have criticized the chain for its sagging stock price in the intensely competitive U.S. grocer space, while at the same time leveraging Amazon’s deep pockets and technology platform.

“Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades – they’re doing an amazing job and we want that to continue,” said billionaire Jeff Bezos, Amazon founder and CEO.

The merger has the benefit of “extending our mission and bringing the highest quality, experience, convenience and innovation to our customers,” said Mackey, a Whole Foods co-founder.