UPDATED– Amazon.com Inc. (Nasdaq: AMZN), which has spent years experimenting with a wide array of delivery technologies from smart applications to flying drones, is poised to shake up the grocery delivery business with its upcoming $13.7 billion purchase of Whole Foods, a chain of markets that aim to sell the “highest quality natural and organic products available.” The deal could well trigger an explosion of M&A activity. In June, Nestlé USA acquired a minority stake in online meal provider Freshly, which uses a subscription service model to cook meals and deliver them directly to consumers.
“Very often a given deal will ignite activity within a sector, and the Whole Foods deal is certainly likely to do that, at least in the grocery channel and perhaps in retail generally,” said Robert Profusek, a partner with Jones Day. “For many corporate actions, there are not equal and opposite, but exaggerated reactions, especially when the first action is taken by a disruptor.”
Instacart, a San Francisco startup that provides online shoppers with same-day delivery service from a variety of retailers, including CVS Health Corp. (NYSE: CVS) and Petco, and counts Whole Foods among its investors and retail partners, will face competition from the Amazon deal. “From the beginning, we’ve been committed to helping grocers compete online,” says a representative of Instacart. “That’s more important than ever, given Amazon just declared war on every supermarket and corner store in America. We already work with over 160 retailers across the country and look forward to partnering with many more.”
Instacart aspires to go nationwide. “Expansion is really a big deal to us,” Instacart head of brand partnerships Dan Bourgault said at Piper Jaffray Co.’s (NYSE: PJC) 37th annual consumer conference, held prior to the Whole Foods deal announcement. The startup, founded in 2012, has raised $675 million in venture capital from Sequoia, Andreessen Horowitz, Khosla Ventures and Whole Foods itself. The company works in about 32 states and has a large presence on the East coast.
Amazon’s Whole Foods deal puts pressure on Instacart and other smaller companies to grow more quickly. Consumers are making everyday purchases and are demanding orders delivered more quickly, and Amazon is aiming to offer delivery in under an hour.
Another company that may feel the heat from Amazon’s Whole Foods deal is GrubHub Inc. (NYSE: GRUB), which partners with restaurants to provide delivery service for online customers. When asked to comment, a company representative from GrubHub said, “We’re focused on innovating to make it easy for millions of diners to order from the broadest, best set of restaurants. We do not comment on any speculation around mergers or acquisitions.”
“We think that Amazon’s growth will come at the expense of grocery-store market share, and eventually envision that Amazon’s success will translate into bankruptcies or consolidation in the grocery sector,” said Wedbush Securities analyst Michael Pachter. There’s already been a lot of grocery store consolidation over the last several years. For example, Supervalu Inc. (NYSE: SVU) agreed to acquire grocery store distributor Unified Grocers Inc. for $375 million recently. In 2016, Apollo Global Management LLC (NYSE: APO) bought the Fresh Market Inc. for about $1.4 billion.
The most intriguing question for dealmakers is: Will Amazon buy more?