Tech giant Amazon is delving further into the grocery market with a $13.7bn deal to buy Whole Foods Market.
Whole Foods' shares rocketed more than 27 per cent at the market open, while Amazon's lifted more than three per cent.
Amazon today announced it will acquire the US-based organic grocer for $42 per share, including debt. That's a 27 per cent premium on the grocery chain's closing price on Thursday.
“Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy,” said Jeff Bezos, Amazon founder and chief executive.
Whole Foods, which has more than 400 stores including seven in London, will continue operating under its own branding, and John Mackey will remain chief executive of the company.
“This partnership presents an opportunity to maximise value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers,” Mackey said.
The deal is expected to close during the second half of 2017.
Amazon first started delivering food last summer with Amazon Fresh, which helped grow its own food shop, and just last week it announced it would expand its reach in the UK even further.
Alex Hamilton, head of insight at eCommera said the deal spells trouble for traditional grocers.
“When it comes to grocery, convenience is key. And there are very few businesses, like Amazon, who have been able to deliver an experience that keep customers coming back time and again," Hamilton said.
“It’s this skill, combined with the acquisition of a significant store estate through Whole Foods, that will worry all grocery retailers in markets where Amazon operates or is likely to soon. This is without even mentioning the tech giant's current experimentation with checkoutless stores.
“The Amazon ecosystem is growing at a relentless pace, through Alexa, Fresh, Prime and its Go format. This means retail businesses need to think carefully about their place in it if they are to mitigate threats posed by a business hell bent on making it’s the brand a ‘one stop shop’.”
Shares in US grocers plunged after the deal was announced. Wal Mart's stock was more than six per cent lower, Kroger's shares dropped 15 per cent, Target fell 10 per cent and Costco was down eight per cent.
But the UK's shops didn't escape the wrath of the shock deal. Tesco's shares made a U-turn as investors flipped from satisfaction at the highest sales growth in seven years to fears Amazon could knock it off its perch as Britain's top supermarket, according to Jasper Lawler, senior market analyst at London Capital Group.
Shares in Ocado, Amazon's rival in the online grocery world, dipped more than two per cent.
"The drop in Ocado shares on the threat of greater competition from Amazon could eventually present an opportunity. Given the Amazon’s spending power and already large footprint in the UK, the Whole Foods purchase probably increases the odds of an Ocado acquisition," Lawler said.