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(Reuters) - Amazon.com Inc said on Friday it would buy Whole Foods Market Inc for $13.7 billion, in an embrace of brick-and-mortar stores that could turn the high-end grocer into a mass-market merchant and upend the already struggling U.S. retail industry.
Amazon used aggressive pricing to become an e-commerce retail juggernaut and has recently been experimenting with brick-and-mortar outlets. It will take over a natural and organic grocer pioneer with 456 stores, a mecca for young, high-end shoppers, that has been struggling to rein in prices and integrate technology.
The deal represents a dramatic turn in strategy for Amazon, which has offered food delivery through its Fresh service for a decade but has not made a major dent in the $700 billion grocery market.
“The ramifications for all of retail are seismic – not just retailers that sell grocery, but for everyone,” Gordon Haskett analyst Chuck Grom said.
For graphic - Whole Foods at a glance - click: tmsnrt.rs/2skJDSv
Shares of dozens of supermarkets, food producers, payment processors and shopping malls collectively lost at least $35 billion in U.S. market value on Friday as the news reverberated across financial markets.
Shares of grocer Kroger Co swooned 9.2 percent, while Wal-Mart Stores Inc fell 4.7 percent, signaling fears that Amazon could broaden Whole Foods' product mix and cut prices.
Amazon's shares rose 2.4 percent to $987.71, adding $11 billion to its market capitalization, which in one sense makes the acquisition nearly free for Amazon shareholders.
"Supermarkets will now have to contend with not only competition with each other and non-traditional grocers like Wal-Mart Stores Inc and Target Corp, but with a retailer like Amazon which has the financial capacity to price aggressively," said Mickey Chadha, vice president and senior credit officer at Moody's Investors Service.
Amazon agreed to pay $42 per share in cash for Whole Foods, a 27 percent premium on the Austin, Texas-based grocer's closing share price on Thursday.
But in a sign that investors believe a rival bid is likely, Whole Foods shares rose above the offer price to close at $42.68.
A former grocery expert at Amazon predicted that the chain, nicknamed "Whole Paycheck", would add a selection of discounted food and build out non-grocery areas within stores, particularly for pharmacy and Amazon devices.
"There’s no value in Amazon keeping the status quo at Whole Foods. Whole Foods was losing market share to Kroger," said Brittain Ladd, who until earlier this year was a senior manager working to roll out AmazonFresh globally.
"It’s pharmacy. It’s having the ability to put stores that are similar to Apple stores inside Whole Foods," he said.
Amazon has been looking at shop layouts that could allow traditional in-store purchase, online ordering with on-site pickup, and home delivery, using store warehouse space as a distribution point, Ladd said.
Despite Amazon's reputation for harnessing technology, a prototype store inside its corporate office in Seattle, called Amazon Go, which uses sensors and tech-savvy cameras to detect shoppers' selections and then charge their Amazon accounts, has rolled out more slowly than planned, a person familiar with the matter said.
And while some analysts expect Amazon to bring vast buying power to Whole Foods, Amazon's heft in the food market is far smaller than in other areas, and high demand for organic products gives farmers unusual bargaining power.
Amazon spokesman Drew Herdener said plans do not include reducing jobs as the result of the deal and that the company does not plan to automate Whole Foods cashiers jobs with Amazon Go technology.
The deal unfolded after Jeff Bezos, Amazon's chief executive officer, approached Whole Foods CEO John Mackey about a month ago and received an eager response from Mackey, two people familiar with the matter said.
The grocer will continue to operate stores under the Whole Foods Market brand, and Mackey will remain CEO, the companies said.
Whole Foods has posted seven straight quarterly sales declines at established stores and recently overhauled its board of directors in the face of pressure from activist hedge fund Jana Partners LLC.
Jana, which disclosed an 8.3 percent stake in Whole Foods in April and is the company's second biggest shareholder, stands to make roughly $300 million from the sale to Amazon.
The deal is for $13.4 billion in cash and the remainder in debt. The acquisition price implies a trailing 12-month price-to-earnings multiple for Whole Foods of 31 times, versus a 14.4 average for the S&P 500 Food Retail index.
Amazon and Whole Foods expect to close the deal during the second half of 2017.
Amazon, started in Seattle in 1994 by Bezos, a former hedge fund manager, has grown into the world's biggest diversified online retailer, with a market capitalization of nearly $500 billion. It has expanded from a book seller into a merchant of nearly all consumer products, as well as producing videos.
Both Amazon and Whole Foods cater to younger consumers including millennials as well as the affluent.
"Amazon could bring technology to all Whole Foods locations, or it could absorb Whole Foods into AmazonFresh. Either way, it's good for consumers like myself," said Di Wu, a New York resident in her early 30s who is a member of Amazon's Prime fast-shipping club and who shops at Whole Foods at least twice a week.
"Amazon is known to drive down prices and make the shopping experience more efficient," Wu said.
Goldman Sachs Group Inc advised Amazon on the deal and provided bridge financing. Bank of America Corp also provided financing to Amazon, while Evercore Partners Inc advised Whole Foods.
Reporting by Lauren Hirsch in New York and Jeffrey Dastin in San Francisco; Additional reporting by Anya George Tharakan in Bangalore, Angela Moon in New York, Lisa Baertlein in Los Angeles, Noel Randewich in San Francisco, Richa Naidu in Chicago; Writing by Peter Henderson and Greg Roumeliotis; Editing by Leslie Adler and Sam Holmes