While the ink is still drying on Amazon.com Inc.'s (AMZN) blockbuster $13.7 billion agreement to buy Whole Foods Market Inc. (WFM) , many are already speculating what the combined company might look like should the deal be completed.
The proposed deal would make a combined Amazon and Whole Foods the nation's fifth-largest grocery retailer, behind Wal-Mart Stores Inc. (WMT) , Kroger Co. (KR) , Costco Wholesale Corp. (COST) and Albertsons/Safeway, according to Cowen and Co. LLC analysts. While the tie-up differs from Amazon's typical acquisition strategy of build first, buy second, Cowen analysts said the acquisition makes sense, given that the grocery market is valued at approximately $1.3 trillion in the U.S.
Above all, it shows that Amazon isn't yet ready to abandon the brick-and-mortar model and believes that physical stores could be the best medium to bring new retail technologies straight to the consumer, said Nancy Tseng, a director in West Monroe Partners LLC's mergers and acquisitions practice.
"This is a key turning point in how we shop, how we buy, how we're influenced and really a reflection of how strong of a role tech and internet companies play in our daily lives," Tseng said.
True to its mantra, Amazon is on a mission to be a customer-centric company, and the Whole Foods deal only builds on that goal. The tech giant will be able to use Whole Foods' existing customer base and 450-plus physical stores that have an "unparalleled" in-store experience to begin an all-out integration of Amazon services in consumers' daily lives, Tseng said. Marrying organic product sourcing with Amazon's supply chain warehouse distribution, product forecasting, pricing optimization and Alexa-powered offerings could revolutionize the consumer shopping experience, she added.
For example, if a shopper were looking to find the perfect organic apple, Amazon could put Whole Foods' distributors to work and then pair them with its powerful logistics infrastructure to deliver things as fast as possible, Tseng said. Last-mile logistics will be critical for that to happen, however.
Editors' pick: Originally published June 19.
"Up until now, we go to the grocery store because it's fast and you have the immediate gratification of 'If I want that apple, I'll get that apple,'" Tseng added. "Amazon has been successful in some cities with delivering produce, but they still don't have quite the same lead time. Integrating drone experiences, their driver model and their delivery model will be critical in the success of this."
Amazon has been thinking about how to transform the grocery shopping process for a while. Amazon Fresh -- the company's stab at delivering produce and pantry items -- generated about $8 billion in sales last year, a modest sum relative to its total sales of nearly $136 billion. The business is growing, but probably not at the rate that Amazon would like it to be, Morningstar Inc. analyst R.J. Hottovy said.
Grocery shopping "has been a slower, tougher category for them to penetrate," Hottovy noted.
Whole Foods' physical store locations will give Amazon instant scale to experiment with the in-store shopping experience, as well as new distribution points for popular products such as the Amazon Echo or its range of Fire products such as the Fire Tablet and Fire Stick. It's unclear whether Amazon will expand its Amazon Go convenience stores (which eliminate the need for cashiers and use sensors to track what consumers buy) to Whole Foods locations, but that could come in the future.
"There's a lot of things [Amazon] could do like operate a mealkit solution, build a virtual restaurant or expand its Amazon Go model," Hottovy said. "I don't think it'll happen for a few years, but you never know. It's different rolling out that tech in more expansive stores."
Before that, Amazon more likely will be focused on the process of integrating Whole Foods into its monster business portfolio. Tseng, who coaches Fortune 500 companies on how to navigate major deals, said she tells firms to focus on why they agreed to the deal and to focus on realizing synergies so they can move onto the next deal.
For Amazon, it raises the question of what the e-commerce giant might do -- or buy -- next. Amazon's play for Whole Foods shows that physical stores are no longer off limits, so it might be interested in going after a home furnishing retailer, a meal kit company or a restaurant delivery company.
Tseng suggested that a retailer of similar size to Nordstrom Inc. (JWN) might make sense. The apparel market could provide a wealth of acquisition opportunities for Amazon.
"I would suspect that they'd want to digest the Whole Foods deal first, though," she said.
Amazon's shares rose 0.1% to $995.73 early Tuesday afternoon. Whole Foods' dropped 0.7% to $42.90.
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