Founded as a bookseller in 1994 and now the world’s biggest online retailer that sells everything from paper towels to designer clothing, Amazon sent grocery stocks into a tailspin Friday when it announced it planned to buy Whole Foods for $13.7 billion.
Critics believe Amazon’s strengths in logistics, its scale and leverage with suppliers could enable it to dominate groceries as it did with bookselling. Antitrust experts who represent deals being reviewed by the Justice Department and the Federal Trade Commission said the transaction will be approved because Amazon sells few groceries and Whole Foods is a minnow in the grocery market with 444 U.S. stores compared with 4,692 for Wal-Mart.
U.S. antitrust enforcement has generally looked favorably on deals that reduce consumer prices, and Amazon supporters contend the deal will be good for consumers. The drop in grocer share prices the day the deal was announced – No. 1 U.S. grocer Kroger fell more than 9 percent – demonstrates the threat investors feel Amazon poses to traditional grocery chains.
“Competitors can be expected not to like a merger that puts more pressure on them. If their share price goes down, it’s a sign they’ll be under more competitive pressure,” said Alden Abbott, antitrust expert at the Heritage Foundation.
Amazon was accused of crippling book retailers like Borders in part through price cutting. At $480 billion, Amazon’s market value equals 90 percent of all the stocks in the S&P 1500 food and staples index, which includes Walmart.
Sagers argues, however, that it would be legal for Amazon to independently develop its grocery sales rather than leapfrog ahead through acquisition. A Republican former antitrust enforcer, who asked not to be named to protect business relationships, agreed.
“The notion of leveraging your power in market A to enter into market B has a been around for a long time as a basis for enforcement,” the ex-enforcer said.
PRECEDENTS IN MICROSOFT, COMCAST
When the Justice Department sued Microsoft Corp in 1998 the lawsuit was aimed at stopping it from using its dominance of the operating system market to also dominate browser software.
Similarly, when the government allowed Comcast Corp to buy NBC Universal Inc in 2011, it tried to ensure Comcast would not interfere with the development of cable’s online competitors.
Some deal experts warn the proposed transaction could hurt companies that supply a combined Amazon and Whole Foods with organic flour, milk and other goods.
Excessive “buyer power” worried Darren Bush, a veteran of the Justice Department’s Antitrust Division who teaches at the University of Houston’s Law Center.
Bush said Amazon’s success in offering a massive array of products at low prices masks a business model that succeeds by pushing producer prices down.
Food producers could soon face the sort of pressure that booksellers faced from Amazon, which for example removed the “buy” button in 2010 from books sold by a publisher it was embroiled in a dispute with.
Historically, changes in the economy – say from horse and buggies to cars – has always led to anxiety as corporate giants fall into decline to be replaced by dynamic upstarts, said Herb Hovenkamp, who teaches at the University of Pennsylvania.
“I always take the long view of these things. Over time, we have always had these big firms that somebody said, ‘We have to do something about these guys,'” said Hovenkamp. “Businesses cycle in and cycle out. There’s no question in my mind that this will happen to Amazon.”
(Additional reporting by Jeffrey Dastin; editing by Chris Sanders and Cynthia Osterman)