Amazon’s shocking purchase of Whole Foods Market last week was just a drop in the bucket — or shopping cart — for the disruption that’s to come for grocery supply chains.

At least that’s what the dozens of e-mails flooding our inboxes and various articles in our newsfeeds would suggest. The Amazon effect had finally bought its way into the grocery market, and supply chain managers should watch carefully, as numerous reports published over the weekend recommend.

Based on these reports, and to help separate wheat from chaff, Supply Chain Dive put together a quick guide explaining the event, what it means for supply chains, and a few questions going forward.

What happened?

The event, as expressed in bullet points, based on a report by Food Dive’s Christopher Doering:

• Amazon announced they would purchase Whole Foods Market, according to a joint press release published Friday morning.
• The all-cash transaction is valued at approximately $13.7 billion, or $42 per share, representing a 27% premium for the grocery store.
• The transaction is expected to close in the second half of this year, and Whole Foods CEO John Mackey will remain on board. The grocery store will continue to operate under the Whole Foods banner.
• The deal sent shockwaves throughout the industry upon the announcement. Walmart’s shares fell 4.7% Friday; Target’s fell 5.1%; Costco’s fell 7.2%; and Kroger’s fell 9.2%, Seeking Alpha reports.

In short, “Amazon has become a leading player in the grocery industry overnight,” according to Raanan Cohen, CEO of last-mile delivery software provider Bringg. “It’s crunch time for the industry.”

Why did the deal happen?

The pairing of an e-commerce giant and a grocery store may seem odd at first, but close observers of Amazon know Bezos has been trying to gain market share in this retail subsector for years.

However, after a decade of attempts to disrupt grocery, the online retailer could only claim 0.8% of the market prior to the deal. The acquisition is an opportunity for Amazon to gain a stronger foothold in the market, but also represents an opportunity for Whole Foods, according to various reports.

In fact, according to ZD Net, it appears to be a perfect marriage because each company can provide what the other lacks. For example:

• Amazon’s desire to disrupt grocery has been stifled by a lack of cold chain distribution facilities and concerns over perishable product quality. Whole Foods owns 11 distribution centers, plus three seafood-specific facilities and one coffee-distribution warehouse.
• Reuters reports that Whole Foods has struggled to manage its own distribution network and has been reluctant to adopt digitally. Amazon’s hardly a newcomer with digital technology, and has proficiently managed a rapidly-growing logistics chain.
• Amazon had partnered with Sprouts Farmer’s Market to gain access to a local store network in Colorado; while Whole Foods counted on Instacart for its last-mile delivery needs. Together, the two companies can be somewhat self-sufficient.

In addition, the two companies have various potential synergies. Namely:

• An omnichannel presence – Amazon now counts on a brick-and-mortar network of 436 stores, capable of fulfilling online orders but also acting as buy-online, pick-up in-store locations for any product. Imagine Amazon lockers in every Whole Foods.
• A complementary audience – An NPD Group analysis shows 20% of Amazon consumers bought at least one item from Whole Foods in the last year. With access to Whole Foods data, Amazon can know some of its customers’ offline behavior in addition to online trends.
• An opportunity to innovate – Amazon’s cashier-free store in Seattle may still be in its pilot phases, but if it ever takes off, the store could quickly implement its patented technology into a national network.
• Greater product diversity – Amazon thrives on the quantity of products in can list on its marketplace. Seeking Alpha reports Whole Foods handles roughly 30,000 SKUs, with exclusive rights to about 5,300 of these.

Why does it matter, again?

The purchase will be a test on both the retail sector and grocery market as Amazon becomes even more prominent in the average consumer’s life.

It’s not that Whole Foods has a mass-appeal just yet, given its pricey products, but the company has a nationwide presence that competing retailers held over Amazon. Whole Foods’ 436 U.S. grocery stores may be but a fraction of Wal-Mart’s 4,700 locations, but it’s nothing to scoff at, either. Even if Amazon does not succeed in bringing e-commerce to grocery, the deal provides an additional source of revenue and real estate.

Amazon did not just buy Whole Foods grocery stores. It bought 431 upper-income, prime-location distribution nodes for everything it does.

— Dennis K. Berman (@dkberman) June 16, 2017

“Amazon’s acquisition of Whole Foods goes way beyond just grocery. This is a major wake-up call for all of retail,” Charles Dimov, director of marketing at OrderDynamics said in an e-mailed statement to Supply Chain Dive.

“Brick and mortar isn't dead, it’s just disrupted at this point,” said Tushar Patel, CMO at Kibo. “Now that Amazon can sell more product on those same day purchases (and include Amazon product in Whole Foods stores), the sky is the limit for them.”

Key questions to watch

The company’s success is not guaranteed, however. In fact, the deal’s announcement leaves several questions unanswered — which could shape how the deal plays out:

• How will Amazon pay for it? The $13.7 billion deal uses up much of Amazon’s available cash. So much that S&P warned it may lower Amazon’s credit rating, pending financing details.
• Can Amazon manage brick-and-mortar well? The fact that Whole Foods’ CEO is staying on board should mitigate fears, but the reality is store management is far from easy. Just as traditional retailers struggle to transition online, Amazon may have trouble managing offline needs.
• How will competitors respond? Kroger, Walmart, Target and other large grocery chains are unlikely to sit back as a major competitor enters the market. Their lower-price models may help them retain a significant market share.
• What happens to the two parties’ deals with Sprouts and Instacart? Whole Foods is a Sprouts competitor, and Amazon competes with Instacart. Those deals are likely being scrutinized despite long-term agreements.
• Will cold chain infrastructure grow even more prominent? The nation has recently seen a boom in demand for refrigerated warehouses. As Amazon threatens to disrupt the grocery space, other retailers’ need for such facilities and cold transportation options may increase, too.

In summation, the deal provides an opportunity for Whole Foods and Amazon to reimagine their supply chains, from procurement to fulfillment. The success or failure of this deal will be a useful case study on how companies can transform supply chains and adapt to emerging market trends.

“This is a battle that doesn't only apply to supermarkets,” Bringg’s Cohen added. “Every retailer, from restaurants to fashion, is facing the same challenges and are well aware that they have to streamline their logistics infrastructure to create a more agile supply chain - which is as much about customer insights and real-time visibility, as it is about speed and convenience.”