Will Whole Foods Give Amazon Indigestion?

By Eliot Brown Features Dow Jones Newswires

For most of Amazon.com Inc.'s 23-year history, the online retailer steered clear of bulky acquisitions, instead picking off small startups and choosing to build products and business lines on its own, be it an e-reader, a movie business or a monstrous cloud computing network.

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That all changed on Friday.

Amazon's $13.7 billion deal to buy Whole Foods Market Inc. dwarfs any previous acquisition by more than a factor of 10 and brings a new level of scale and complexity for the online retailer to digest.

The company's largest acquisition came in 2009, when it purchased Zappos.com Inc. for $1.2 billion. The online shoe retailer fit snugly into Amazon's main business, and its under-2,000 employee workforce was relatively easy to absorb.

Whole Foods has about 90,000 workers spread around 460 stores in over 40 states and three countries, a real-estate footprint that totals six Empire State Buildings' worth of space. The staff alone increases Amazon's workforce of 341,000 by roughly one-fourth, and it would make a giant leap into bricks and mortar stores for a company that has long loathed physical retail and only recently began operating a handful of stores.

With scant detail from Amazon, Wall Street was full of questions Friday as to how the acquisition would transform the Seattle retailer. How would Whole Foods fit in with Amazon's Prime delivery service? What does it mean for Amazon's nascent grocery-delivery business? Will Amazon stock Whole Foods with its hardware offerings and books, or leave it untouched as its own unit?

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But one point was clear: the sheer size is a new thing.

Mark Mahaney, an analyst at RBC Capital Markets, wrote in a note to clients that while Amazon has been trying to get some bookstores off the ground, "the company has always veered away from physical retail presences."

In March, Amazon struck a deal to acquire Dubai-based Souq.com, one of the Middle East's largest e-commerce businesses that offers over 8.4 million products. And while Amazon strayed a bit far afield from its main business with the 2014 purchase of online video-gaming company Twitch Interactive for $970 million, that startup had just 170 employees working out of a small San Francisco office.

Even for large deals that seem to fit with Amazon's DNA, headaches have arisen. In March, Amazon announced it was shutting down its Quidsi unit, the owner of Diapers.com, which Amazon picked up in 2010 for $545 million, because it couldn't make it profitable.

And Zappos, run as its own autonomous unit, faced an exodus of 14% of its core staff two years ago amid a rocky transition to a management system in which employees don't have bosses.

(END) Dow Jones Newswires

June 16, 2017 15:17 ET (19:17 GMT)