Here's why Amazon is buying Whole Foods

iStock

NEW YORK CITY — Amazon swooped in to buy high-end grocer Whole Foods, paying $US13.7 billion — and a healthy 27% premium over the previous day’s closing price.

So what’s in it for Amazon?

There are a couple strategic plays at work for the online-retailing giant.

For starters, acquiring Whole Foods’ 440 US stores — many of them in primo locations — will bolster the network for AmazonFresh, the company’s online grocery delivery service.

“To ship efficiently groceries to consumers, you need physical distribution (item-picking to put parcels together, click & collect points) close to the consumer,” analysts at Bernstein wrote in a research note. “Stores are ideally located for that. They won’t look like stores in 5 years time, but they will be in those locations.”

AmazonFresh’s rollout has gone slower than expected, according to analysts at Credit Suisse.

The move also makes a lot of sense given the weapon Amazon unveiled back in March: AmazonFresh Pickup.

The service allows customers to order groceries online, then set a time for pickup as soon as 15 minutes after they place the order. There are only two locations, both in Seattle, so far, but AmazonFresh Pickup could scale up rapidly after Friday’s deal.

The move will also improve the selection of grocery items for AmazonFresh users, as well as strengthen Amazon’s bargaining position with suppliers, according to Credit Suisse.

Buying Whole Foods will also ramp up Amazon’s private-label grocery business, an industry that is growing steadily in the the US and other developed markets, Bernstein noted.

“Developing [private label] is time consuming. This gets Amazon straight up the curve with a credible, albeit upmarket, range,” Bernstein said in the research note.

NOW WATCH: Harvard Business School professor explains the most important problem we have in finance today and how to fix it

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.