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Amazon-Whole Foods deal meets a business need on both sides

In any business deal between equals, you would assume that each side is getting something it wants and bargained for. Nevertheless, you often see a power differential that makes a deal seem lopsided.

The recent announcement that online retailer Amazon is buying Whole Foods Market Inc., "sent shock waves through the grocery industry," according to the Courthouse News Service. The move signals a dramatic shift for Amazon, which already offers some grocery items online but which has not operated brick-and-mortar grocery stores in the past.

The $13.7-billion deal was announced Friday morning and is expected to close in the second half of this year. Amazon has pledged to pay $42 per share for the natural and specialty foods retailer, including its debt. The move had both companies' stocks moving sharply lower, at least initially.

What will each side get?

A month ago, Whole Foods suffered a board shake-up due to falling sales. The company is famous for offering healthy and organic versions of standard supermarket fare, but it increasingly faces competition from stores such as Trader Joe's, Earth fare and Aldi. Moreover, a European grocery chain called Lidl is about to enter the U.S. grocery market on the East Coast.

Founded in 1978, Whole Foods has faced challenges both from other natural foods retailers and low-cost stores. In early years it took significant effort to set up relationships with local and organic farmers, and consumers were happy to have any retailing option for the goods.

In more recent years, competitors have been able to offer their own lines of natural and organic foods. Meanwhile, cost-conscious consumers are often choosing cheaper alternatives. Specifically, it has pointed to pressure from meal and restaurant delivery services and traditional supermarkets as problematic.

After the sale, Whole Foods will continue to operate its stores under the same name and with the same CEO from its Austin, Texas, headquarters. This will allow it to maintain its current branding, consolidate gains and add new offerings with a large infusion of new cash from Amazon.

Among those new offerings will be both home delivery and curbside pickup of pre-orders. This will take the company directly into the ring with Wal-Mart.

As for Amazon, the main benefits of buying Whole Foods seem to be increasing its market share in grocery items and getting a foothold in the brick-and-mortar world. Consumers do like to shop online, but it's hard to get people to make impulse purchases there. With shoppable stores, Amazon might offer many of the products that are currently available online and increase sales with direct exposure to shopping consumers.

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