Here’s why Amazon is buying Whole Foods (AMZN, WFM)

Amazon swooped in to buy the high-end grocer Whole Foods on Friday, paying $13.7 billion, or $42 a share — a healthy 27% premium on the previous day’s closing price.

So what’s in it for Amazon?

There are a couple of strategic plays at work for the online retail giant.

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

“To ship efficiently groceries to consumers, you need physical distribution (item-picking to put parcels together, click-and-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 five 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 in March: AmazonFresh Pickup.

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

The move could 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 could also ramp up Amazon’s private-label-grocery business, an industry that is growing steadily in the US and other developed markets, Bernstein said. Whole Foods’ 365 Everyday Value brand is already popular, and Amazon would be able to expand its footprint.

Bernstein said in the research note that developing a private-label business “is time-consuming.”

“This gets Amazon straight up the curve with a credible, albeit upmarket, range,” it added.

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