Amazon announced Friday that it would buy Whole Foods for $13.7 billion, cementing its ambitions to grow in the grocery space. While the supermarket chain has seen declining sales since 2015, Whole Foods’ physical footprint and major investments in private label and e-commerce features make it a valuable acquisition for Amazon.

Amazon wants to become one of the country’s top five grocers by 2025 – an achievable goal given its massive presence and the fact that grocery in the US still tends to be a regional, fragmented business, with the exception of national brands like Walmart and Target. Buying Whole Foods, which caters to the same urban, affluent shoppers as Amazon, expands the e-tailer’s footprint in areas home to its core customer base, particularly in cities such as New York and San Francisco. That’s important not only as Amazon expands into brick-and-mortar, but also for fulfillment: the acquisition provides the AmazonFresh program, currently only in 15 markets, with 465 new locations that generate eight million customer visits per week as well as 11 warehouses. In contrast, Walmart has just 400 locations for in-store pickup, although the retail giant is aggressively expanding that service.

In addition to building Amazon’s physical grocery business, Whole Foods can help the e-tailer add to its growing array of private label products. Whole Foods generates $2.3 billion worth of private label and exclusive brand sales per year; its private label products account for 32% of items in Instacart’s food category, taking up far more of the shelf than Walmart Grocery (16%) and Peapod (6%). While Amazon has also introduced its own private label food brands like Wickedly Prime and Happy Belly, these account for just a small share of shelf in Amazon Fresh’s soup and snack categories.

Share of shelf

Grocery remains the most under-penetrated e-commerce category, with less than 5% of sales happening online. However, with 20% of grocery sales estimated to begin online by 2025, brands investing in digital will reap the rewards. While Amazon may aim to beef up Whole Foods’ online offerings, the retailer is already a category leader in digital, earning the top rank of any grocer in L2’s Digital IQ Index: Big Box thanks to sophisticated investments in omnichannel features like the ability to check in-store inventory and clip digital coupons that can also be used in physical stores.

As the grocery rivalry heats up, with Walmart ramping up the pace of its investments and German discounters Lidl and Aldi expanding their US footprint, acquisitions like this could become increasingly common. One possibility might be Kroger, which just reported weak results; a wholesale club such as BJ’s could also help Amazon expand beyond its existing customer base. While Whole Foods’ customers align with the Amazon Prime demographic, Amazon recently lowered the Prime membership fee for low-income consumers, signaling its intent to compete with Walmart for the rural population. The e-tailer’s next target for acquisition could be a brand that would help it attract those low-income shoppers.

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