The Amazon - Whole Foods deal: searching for the Holy Grail

The internet giant Amazon has made a takeover bid for the American retail food chain Whole Foods Market. This constitutes a direct attack on the established retail food corporations. Looking at the deal from a European and German perspective, it is unlikely that the reaction will be takeover bids for German organic supermarkets.

If a corporation offers 42 dollars per share of another company that mounts up to a tidy sum. In this case, it's around 13.7 billion. That's what Amazon is prepared to pay for the American retailer Whole Foods Market. When this was announced on 16 June, there was an immediate reaction on the stock exchanges. The value of Amazon shares rose by three percent. Whole Foods Market increased by more than 25 percent. That's roughly the premium Amazon is paying on the stock market value of the company.

Conversely, the value of other food corporations declined. Walmart fell seven percent and Kroger 15 percent. In Europe too the shares of the big retailers like Tesco, Carrefour and Metro tumbled, although not to the same degree. “We fear that what Amazon has done in other sectors is now threatening the retail food trade,” explains Martin Schneider, fund manager and analyst for consumer stocks at Deutsche Asset Management.

Don't resort to actionism

They are, however, staying calm at the Bundesverband Naturkost Naturwaren – the German Association of Organic Processors, Wholesalers and Retailers. Especially as Whole Foods Market his not represented in Germany, explains Managing Director Elke Röder and she adds: “Nevertheless, this sudden acquisition tells us that in  future it's not going to be a question of online or offline but that there will be combined strategies.” So the wholefood sector ought  to weigh up carefully the opportunities and risks of the online trade and develop its own strategies. “It would be wrong to panic or involve ourselves in direct action,” says Sabine Schaller-John, head of corporate communication at Germany's biggest organic wholesaler Dennree, adding that they regard Amazon as an important competitor whose development Dennree is watching closely.

The deal has some way to go. The shareholders still have to accept the offer and the cartel authorities have to approve it. On Wall Street people were saying they thought a counter-bid was in the offing. So far, however, no counter-bid has been made. If things go according to plan, the Amazon and Whole Foods Market transaction will be completed in the second half of this year.

Once this has happened the online trader will own around 460 stores predominantly located in the USA and partially stocked with organic goods. But they weren't the main reason for the deal, says Fund Manager Schneider: “Amazon has bought a springboard for doing business with food, product developers, an own brand and knowledge about logistics in particular and including the cold chain from producer to end customer.” This is because initiatives like Amazon Go and Amazon Fresh, aimed at selling food products via the internet, have not been as successful as they thought they would be. And, although Amazon has got many experts, it hasn't got product competence in the retail food sector and certainly not in the organic sector.

Whole Foods Market in San Francisco

Targeting higher earners

But food is an interesting sector. “The retail food trade is the Holy Grail of e-commerce,” explains Marco Atzberger, a member of the executive board at EHI Retail Institute. Food and drugstore products have constituted about half the turnover in the retail trade. With Whole Foods Market, Amazon also has access to an interesting target group, namely higher earners. “The focus is less on the organic segment than on the high-price segment,” Schneider maintains. On account of the high number of conventional products in its assortment, Whole Foods Market has a much wider base than German organic supermarkets. The products, including its own brand, have a good reputation. “However, in recent times business hasn't been going so well – because of its many problems Whole Foods Market has in effect put itself up for sale,” says Schneider.

That's no surprise because, although the company has opened new stores every year, it has not attracted new customers on the same scale. This why Schneider says the price Amazon is offering is rather high. Despite criticism of the way Whole Foods Market handles its employees, it has been regarded by many people as sustainable and a good company to invest in. “As soon as the takeover is completed Whole Foods Market will automatically disappear from the universe we all occupy,” says Gunter Schäfer, spokesperson for asset management company Ökoworld, to which the Ökovision fund belongs.  Amazon is rated here as not suitable for investment in this sustainability fund.

Store owners ought to react

The transaction has obvious consequences for bricks-and-mortar food retailers, especially in the USA. First,  Amazon  has to integrate Whole Foods Market into its own corporation. As Schneider explains, it is after all the biggest takeover in the history of the firm: “But, once that's done, if just a bigger proportion of goods are bought online, the traditional supermarkets have got a problem.“

This means that the operators of food stores have got to react. Marco Atzberger from the EHI Retail Institute sees the entry of Amazon into the food business as a sign that retailers have to start thinking about of doing online business too. “But at the same time it's an indication that the bricks-and-mortar trade is stronger than the online trade.”

That's another reason why the online trader Amazon is now focusing on fixed- location stores. In fact, the number of possible companies for taking over was limited. Market leader Walmart and its most serious competitor Kroger are too expensive. “Apart from Whole Foods Market there are only a few other nationwide chains in the USA,” says Atzberger.

Relevant, but very concentrated market

The American market functions differently from the the German market. For this reason the big retail corporations in Germany don't have to react immediately. “I don't feel I have to say that now they've all got to buy an organic supermarket chain,” Schneider explains. This is because in Germany the retail food trade is concentrated principally on Aldi, Lidl, Edeka and Rewe. Schneider's view: “So it's not easy to build up a new chain across the whole of the country.”

Moreover, predators in the conventional sector have had a hard time in the past in Germany. When Lidl joined forces with Basic ten years ago, customers went on strike. The boycott led to Lidl soon abandoning its involvement. Rewe closed its Vierlinden organic supermarkets. Its organic Temma chain is expanding slowly. Most food chains have now integrated organics into their product range, but they leave plenty of scope for the specialist trade.

This doesn't mean the wholefood trade can just sit back and watch. “On account of its size alone, Germany is a relevant market,” says Atzberger. That makes it of interest to Amazon. The question is only how the Americans would be able establish themselves here. Atzberger names a possible candidate: “Metro keeps  talking about Real and the future of the stores in the corporation.”

Nationwide store network a must

In theory it could be the other way round. According to a spokesperson, because Metro is in the process of decentralising its business, they are not currently thinking of taking over an organic supermarket chain. Edeka refused to comment for reasons of competition. Rewe does not answer questions on this issue.

The fact is that organic supermarkets are only interesting for a potential buyer if they have a nationwide network of stores. “Where would  Amazon benefit if it were to take over Vollcorner for example?”  Schneider asks. If it came to a takeover, the Americans would have had to take over Tegut. The supermarkets  have a comparatively high proportion of organic products in their range and they were for sale in 2012. But then the Swiss Migros beat them to it.

So in the organic sector in Germany there are theoretically just two targets for takeover. “Basically, companies operating nationally fit the profile,” says Atzberger. There are only Denn's and Alnatura. However, franchise systems that you find in the case of Denn's are difficult to take over.

Moreover, it may be that the company has its reservations. Definitely not so in the case of Whole Foods Market founder John Mackey – on the contrary, he said it was love at first sight.

And whereas in Germany the smaller organic supermarket chains Basic and  Bio Company  refuse to comment, the big two have no inhibitions. Thus Dennree insists that takeover bids are out of the question. The head of Alnatura, Götz Rehn, also has an unequivocal message: “Alnatura is not for sale.”

Headquarter of Germany´s  biggest organic distributor Dennree in Töpen. Photo © Dennree