Amazon gets physical

The online retailer is buying a supermarket chain. The logic isn't obvious, but the deal will shake the industry. Ben Judge reports.

The $13.7bn bid by online retailer Amazon for US grocery chain Whole Foods certainly seems to have made Whole Foods' top brass happy, says Jessica Dye in the Financial Times. Chief executive John Mackey "wasn't exactly coy" about his feelings regarding the tie-up: "I am, like, super excited. It was truly love at first sight," he gushed when speaking to his employees after the deal was announced. Co-chief executive Walter Robb was similarly starstruck. "This is a day of magic. This is a day of pixie dust," he said.

Of course, Mackey has good reason to be happy his shareholding is worth $8m more than it was before the bid. So do Whole Foods' other shareholders including hedge fund Jana Partners, which has been pushing for a sale and will make about $320m from two months of agitating. But what will Amazon's shareholders make of the tech firm's first big venture into physical retailing? The deal is "truly in a class of its own", says Howard Yu on Forbes. "None of the conventional reasons can explain the acquisition." Indeed, the pairing does seem "odd", say Izabella Kaminska and Alexandra Scaggs on FT Alphaville. Amazon's only foray into bricks and mortar retailing so far has been to open a few bookshops, "which have not been terribly customer friendly". Still, the deal provides clear confirmation that "grocers are the next industry in the crosshairs".

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That's no surprise, says Shira Ovide on Bloomberg Gadfly. Groceries account for "about 30% of total US personal spending", but little is spent online at present. "The big question is whether Amazon sees the future of groceries as online delivery, shopping in store, or a hybrid." The truth is that nobody knows not even Jeff Bezos, Amazon's founder. However, Bezos can afford to experiment, and "will slash prices and bleed money for years in groceries if that's what it takes".

It's not yet certain that Amazon will end up with Whole Foods. Some analysts are already speculating that the approach could lead to a bidding war. For example, other retailers such as Walmart, Target and Kroger could bid because they may "have too much to lose not to bid", Karen Short of Barclays tells CNN Money. Even if they don't succeed in prising Whole Foods away from Amazon, it could be worth their while to drive up the price and force Amazon to pay more. Whatever happens, says Ovide, "it's safe to say that the boring US grocery business is about to become much more interesting".