Why Amazon added Whole Foods to its cart

As a result of the acquisition, we're raising our fair value estimate on the wide-moat online retailer.

R.J. Hottovy, CFA 28 June, 2017 | 5:00PM

 Amazon's (AMZN) US$13.7 billion acquisition of  Whole Foods Market (WFM) marks its most significant push into the grocery category, but likely left some investors scratching their heads after more than two decades of building an e-commerce empire without physical stores.

Despite rumours of Amazon being interested in Whole Foods or other physical retailers in recent months, the timing of the announcement caught us by surprise, as we expected the company to further test its other grocery concepts before going all-in with physical stores. Nevertheless, we do see several reasons why this acquisition is more than just a push into the grocery category, and why it can enhance Amazon's wide moat.

First, there is already a high degree of overlap between Amazon Prime members and Whole Foods shoppers, with opportunities to migrate existing Prime members to the Fresh member tier. Second, Amazon adds instant credibility in fresh produce and proteins through Whole Foods' supplier base, something that had been slow to materialize with Amazon's grocery efforts to this point.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc3,200.00 USD0.55
Costco Wholesale Corp326.23 USD0.21
Walmart Inc130.68 USD2.29

About Author

R.J. Hottovy, CFA

R.J. Hottovy, CFA  R.J. Hottovy, CFA, is a consumer strategist for Morningstar.

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