Amazon-Whole Foods deal shades Walmart, Target

In a move seen as filling a critical gap in its plans to track U.S. consumers, Amazon.com announced Friday that it would acquire the Whole Foods Market chain —  nicknamed "Whole Paycheck" by its affluent urban and suburban shoppers — for $13.7 billion.

News of the deal drove rival food retailers' shares lower Friday. While the online-shipping and internet-services giant's already-high stock price rose 2.4 percent, up $23.54 to $987.71 at the close, shares in Wal-Mart were down 5 percent, Target down 5 percent, Supervalu down 14 percent, Kroger down 9 percent, and Dollar General down 3 percent on fears Amazon would use its cash and tech assets to squeeze other grocers.

Shares of Whole Foods rose 29 percent to $42.68, up $9.62 — a little more than Amazon's offer price, implying some investors expect Walmart or another rival might launch a higher bid.

"Nobody goes to the internet for information about buying a bottle of bleach or a can of tuna. But groceries are 10 to 20 percent of what everyone spends. For Amazon, who wants data sets on everything you consume, that's been a major blind spot. And now they can suddenly fill it, with the upscale urban consumers at Whole Foods," said Mike Sands, chief executive at Signal, a Chicago-based digital marketing company whose clients include grocery, clothing and financial retailers.

"On their website, they can already read your mind" and suggest books, video and clothing like the products you've previously purchased, Sands added. "Now they will expand that into the world of groceries. They will know what you shop for and what you consume. It really completes the curve of information on what you are doing."

The Whole Foods deal fits Amazon's "recent forays into the grocery industry," noted Tom Caporaso, chief executive of Connecticut-based Clarus Commerce, whose FreeShipping.com portal competes with Amazon's Prime service. The merger would make it possible, he said, for Amazon "to integrate its Prime service into the Whole Foods ecosystem" and use Whole Foods stores as distribution centers for Prime Now and Amazon Fresh food deliveries.

Nationwide, Whole Foods' 444 stores and support offices employ 87,000, about one-quarter the size of Amazon's workforce before the deal. In the Philadelphia region, Whole Foods operates stores on Pennsylvania Avenue and South Street in Center City; in Devon, Glen Mills, Jenkintown, North Wales, Plymouth Meeting, and Wynnewood in the Pennsylvania suburbs (stores in Exton and Newtown Square have been delayed); and in Cherry Hill, Marlton, and Princeton, N.J.

The chain's organic and prepared-foods offerings attract the same kind of people who use Amazon Prime, analyst Chuck Grom noted in a report to clients of Gordon Haskett Research Advisers in New York. But "if the goal is to fully compete against Wal-Mart" and other mass-market grocers, Amazon should consider buying Dollar General or another "low-end" chain, he added.

Justice Department competition regulators will likely see "little overlap" between Amazon's and Whole Foods' businesses, Rutgers-Camden Law School professor Michael Carrier said in a social-media post. Currently, the companies hold only a small percentage of the grocery business.

The possibility of Amazon one day dominating groceries, alongside its fast-growing order-fulfillment and Amazon Web Services businesses, raises the prospect of a "super-monopoly" company and questions that haven't been addressed by U.S. antitrust policy, according to Columbia University Law School professor Tim Wu, who studies the impact of new technologies on competition and marketing.

Friday afternoon, Standard & Poor's warned that Amazon's borrowing to finance the deal would have "negative implications" for the agency's AA credit rating on Amazon debt. The lower the credit rating, the more a borrower typically has to pay lenders and bond buyers to purchase its debt.

The deal is Amazon's largest transaction to date, according to data compiled by Bloomberg. Seattle-based Amazon had about $21.5 billion in cash at the end of March, according to Bloomberg.

In an email statement, Whole Foods assured its customers that "Amazon shares Whole Foods Market's deep commitment to quality and customer service. We will continue to operate our stores and deliver the highest-quality, delicious natural and organic products that you've come to love and trust."

Whole Foods faces stiffening competition from lower-priced chains that have expanded their "natural" and prepared-foods offerings. On Friday, Whole Foods traded above Amazon's offer price, as if investors expect that Wal-Mart or another potential buyer will make a higher offer.

The Amazon announcement comes a month after Whole Foods announced a board shake-up and cost-cutting plan amid falling sales. The grocery company was reacting to pressure from activist investor Jana Partners, which owns about 8 percent of Whole Foods. Only index-fund giants Vanguard Group and BlackRock own more. If the deal goes through as planned, Jana will make a fatter profit than the long-term index-fund investors because it bought the stock this year at what now look like bargain prices.

Jeff Bezos, Amazon's chief executive, has sought in recent years to expand grocery delivery and to add physical retail locations, including pickup points and bookstores. The move also puts Whole Foods under the same corporate control as the Washington Post.