Dive Brief:

• Amazon announced on Friday morning they will purchase Whole Foods Market for $42 per share in an all-cash transaction valued at approximately $13.7 billion, the companies said in a statement.
• Whole Foods Market will continue to operate stores under the Whole Foods banner once the transaction closes, which is expected to go through in the second half of this year. John Mackey will remain onboard as CEO of Whole Foods. 
• The purchase of Whole Foods will complement Amazon's other initiatives into grocery including its Amazon Go retail concept and AmazonFresh, its online delivery operation.

Dive Insight:

Amazon made its biggest bet yet on the grocery space by announcing the $13.7 billion purchase of organic and natural foods giant Whole Foods. The acquisition of the supermarket chain will complement Amazon's other initiatives in the $600 billion grocery industry — including its nascent grab-and-go retail concept and its online delivery operations — where the company has been slow to make inroads.

The acquisition by the e-commerce giant — the largest in its history — will give Amazon a commanding presence in the brick-and-mortar grocery space and allow it to expand its customer base by offering more fresh produce, meat and other products. The  strong push into the grocery business comes at the same time as other traditional retailers such as Kroger have been hit by growing competition and shrinking margins.

The surprise marriage combines a pair of companies known for vastly different things — with Amazon popular for its convenient delivery and low prices and Whole Foods known for its high-quality, premium organic and natural products.

“To a certain extent, this does make a lot of sense. Amazon has struggled in food, we know that,” said Diana Sheehan, director of retail insights at Kantar Retail. “If you think about that Whole Foods shopper compared to Amazon, the Whole Foods shopper profile is actually a shopper profile that is very closely aligned with who Amazon wants to reach on an ongoing basis. It definitely … has to be appealing to Amazon.”

Whole Foods has lately been under pressure from two major shareholders — activist investor Jana Partners and mutual-fund manager Neuberg Berman — who have been pushing the Austin, Texas-based grocer to sell itself. In response to the pressure, Whole Foods recently overhauled its board and made a series of changes to its business, including cutting internal costs by another $300 million, increasing targeted promotions and lowering prices.

While organic is a big draw for many retailers, the arena has become increasingly crowded as more players such as Wegmans, Walmart and Kroger expand their offerings. Once one of the only places to get organic, Whole Foods has seen the market flooded with more of the produce, often at a cheaper price.

Until recently, Whole Foods CEO John Mackey seemed reluctant — at least publicly — to consider a sale of the company he founded 37 years ago after opening his first store in Austin, Texas. Earlier this week, Mackey criticized activist investor group Jana Partners, calling them “greedy bastards” who are trying to destroy his reputation and that of Whole Foods.

Mackey, who will remain CEO when the deal with Amazon closes, said the transaction was the best option for the company and its customers and shareholders. “This partnership presents an opportunity to maximize value for Whole Foods Market’s shareholders, while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers.”

For Amazon to make significant inroads into grocery industry, it needs to increase its footprint in so-called traditional stores and can't just depend on its online business to do it, according to analysts. The company faces significant competition from discounters such as Aldi and Lidl, which opened its first 15 stores in the U.S. this week, and other online grocery services like Instacart. 

“If they’re going to be significant players in the grocery space, they’re going to have to attack that industry with a combination of online as well as brick and mortar,” Neil Stern, a senior partner at retail consulting firm McMillanDoolittle, told Food Dive. “It’s a very difficult category to penetrate purely online. AmazonFresh has grown very slowly relative to their other businesses, so it certainly gives them now the distribution footprint for them to get a whole lot more serious in the grocery space.”

While online grocery operations give consumers the convenience of shopping without ever having to leave their homes, it does come with obstacles, including the public’s preference to pick out their own produce and the difficulties that come with picking, handling and shipping fruits and vegetables. Amazon has recently been experimenting with a cashier-less grocery store concept called Amazon Go that allows customers to walk in, grab the items they need and walk out — though the operation has so far been dogged by technical glitches. 

The deal will have major reverberations across the grocery space, analysts say.

"[The deal] puts grocers on notice that Amazon is going to be a serious and formidable player on the grocery business,” Moody’s Vice President Mickey Chadha wrote in a note emailed to Retail Dive. “As other brick and mortar retailers have come to realize the hard way that competing with Amazon is a formidable challenge, supermarkets will now have to contend with not only competition with each other and non-traditional grocers like Walmart and Target, but with a retailer like Amazon which has the financial capacity to price aggressively, and the smaller regional supermarket chains and independents will bear the most pain.  We expect this transaction to further accelerate the consolidation within the supermarket space."

In early trading, Amazon's stock price was up 3% on the news while trading on Whole Foods stock was frozen before the market opened. Other grocery retail stocks have taken big hits from news of the Amazon/Whole Foods deal: At press time, Kroger stock was down 13%, SuperValu was down 14%, Sprouts was down 12%, Walmart was down 5%, Target was down 10%.

With the deal, Amazon could conceivably integrate Whole Foods’ estimated 450 stores across 42 states into its AmazonFresh business. Amazon also has millions of customers using its wildly popular Prime Service that could be used to further expand its grocery presence. Amazon could conceivably allow its members to have Whole Foods items delivered to their homes.

“Amazon is saying, ‘We’re in it to win it, and we’re going to do whatever we need to do here, and you need to start taking us seriously,'” Kantar's Sheehan said.

Jeff Wells contributed to this story.