Why is Amazon buying Whole Foods for $13.7 billion?

whole foods

It’s official: Amazon.com ($AMZN) is buying Whole Foods Market ($WFM). The online retail giant will scoop up the “conscious” supermarket and their 430+ locations for a cool $13.7 million. If the deal is approved by shareholders and governing regulatory committees, Whole Foods will become an Amazon company within the next year.

Questions remain on how the company will integrate Whole Foods into the Amazon ecosystem. Yet with the deal’s announcement just hours old, customers and investors are asking the most important question of all: why would Amazon, of all companies, buy Whole Foods?

Amazon wants to dominate the grocery world.

Amazon already has their AmazonFresh grocery delivery service, but it’s only available in certain areas. Expanding AmazonFresh would be costly and time consuming. By buying Whole Foods, Amazon can use the company’s nationwide locations to rapidly expand AmazonFresh in a shorter time span. The company can use their billions to negotiate lower food prices, while lowering overhead by automating in-store tasks. By offering food at lower prices and integrating handy features like online shopping and delivery, Amazon could pose a serious threat to other, less “convenient” grocery store chains.

Amazon will get more people to subscribe to Prime.

Amazon Prime customers buy more than non-Prime customers. By offering Prime benefits within Whole Foods like delivery and discounts, Amazon could get millions of new Prime subscribers. They could also integrate Whole Foods stores into their Prime ecosystem and treat it like AmazonFresh, allowing online shoppers to buy from Whole Foods without leaving home. Shoppers will then have the added incentive to buy other products through Amazon, making the retail giant even more money.

What does this mean for Whole Foods shareholders?

Amazon will buy the grocery chain at $42 per share. This is around a 27% markup from $WFM’s recent stock price. If the deal goes through, shareholders will get significantly more for their stock. At the same time, new shareholders buying the stock won’t make any money. Since the stock is currently valued at $42.08 per share, they’ll actually lose 8 cents per share.

What does this mean for Amazon shareholders?

Amazon will expand their grocery business, thus expanding their revenue from millions of potential new Amazon customers. This will help their bottom line, which will likely increase shareholder demand and share value. After this morning’s acquisition announcement, $AMZN went up by nearly 3%, meaning shareholders are positive about the company’s acquisition and see it as a viable way to rapidly expand their grocery business.

Should you invest in either company?

If you buy $WFM over $42, you’ll lose money once they get acquired. If you invest under $42 per share (if the company goes down in value before the acquisition is complete), you’ll make some money, but not a whole lot.

If you invest in $AMZN, you have the potential to make gains once the buyout is complete. This $13.7 billion purchase could be worth billions more if it helps Amazon become the biggest American grocery store. This potentially means a further increase in share value in the near future.

If you decide to invest in either company, be sure to do you research first. Knowing what you’re investing in is crucial to becoming a successful investor. Simply putting money into a stock and hoping for the best could make for some nasty surprises down the line.