Amazon buying Whole Foods

[brassmonkey]

When Kroger (KR) dropped 18% on Thursday following disappointing first quarter results, CEO Rodney McMullen acknowledged straight-on challenges in the industry.

"There is a lot of change in the food retail industry, both in terms of the operating environment and the competitive landscape," he said. "We know there is a lot of upheaval in the food retail industry."

On Friday, that remark became a historic understatement.

Kroger shares fell another 14% on Friday morning after Amazon (AMZN) announced it would acquire Whole Foods (WFM) for $13.7 billion or $42 per share.

"The ramifications for all of retail are seismic-not just retailers that sell grocery, but for everyone," according to Gordon Haskett's Chuck Grom.

The online retail boom has been devastating for brick-and-mortar sellers of electronics, clothes, books, and many other goods where price and convenience are priorities for consumers. While online grocery shopping has been around for a while, it was never considered a major threat to traditional grocers like Kroger and Safeway. That is, until now.

"The acquisition says as you look toward the future, you can't just do brick and mortar groceries and you can't just do online groceries," according to Needham's Kerry Rice. "A big piece of this is logistics, where the grocery stores haven't been able to do well-Getting it to you quickly and building out a network."

Barclays' Karen Short called the deal "Darwinism at its best."

Whole Foods, which traded as high as $65 a share in October 2013 before falling to under $30 earlier this year, had tried vigorously to push through an online strategy amid declining sales and pressure from activist investor Jana Partners (which revealed in April it had built a 9% stake in the company).

In November 2015, the organic food pioneer outlined a nine-point turnaround plan to combat declining sales, and CEO John Mackey specifically emphasized digital strategies as part of that.

"We will invest in digital strategies to convert the strong traffic we generate online into sales," he said during the company's conference call that month. "We have integrated Instacart into our app, will soon launch a national sales flyer, and will continue to make upgrades to provide more functionality and streamline our customers' digital experience."

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