Commentary

Amazon Cutting Whole Foods Prices; Competitors Brace For Impact

Amazon’s Jeff Bezos is wasting no time in bringing his Unique Underselling Proposition to Whole Foods. A joint press release yesterday proclaimed “the two companies will together pursue the vision of making Whole Foods Market’s high-quality, natural and organic food affordable for everyone.”

The cuts will be effective Monday but Whole Foods outlets will be closed for the day, presumably so employees can, among other things, put new price stickers on the likes of “organic bananas, responsibly-farmed salmon, organic large brown eggs, animal-welfare-rated 85% lean ground beef, and more.” 

“Sorry, supermarkets: Amazon.com Inc. just confirmed that your worst nightmares are about to come true,” writeBloomberg “Gadfly” columnists Shira Ovide and Sarah Halzack. 

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But they already knew that, of course. 

“Ever since the e-commerce giant announced in June that it had agreed to buy Whole Foods Market Inc., speculation had been in overdrive about how their combined powers could shake the grocery industry,” they continue.

Still, that “one line” about cutting prices yesterday, according to a Wall Street Journal headline, was enough to “roil” grocery stocks. “Kroger dropped 7.3% on heavy volume, while Sprouts Farmers Markets fell 6.7%, and SuperValu was down 6%. Wal-Mart Stores dropped 1.7%, Costco Wholesale sank 4.2% and Target slid 3.5%,” reports Ben Eisen.

The Federal Trade Commission gave a green light to the deal on Wednesday.

The New York Times’ Nick Wingfield and David Gelles observe that the significance of the move yesterday “goes well beyond” the price slashing. “Mr. Bezos has always been willing to lose money, disappoint shareholders and start discount wars in his efforts to challenge and inflict pain on competitors. In the 23 years that Amazon has been in business, he has done it again and again — with books, diapers and now groceries — fundamentally changing entire retail categories,” they write.

“I absolutely think it’s putting the rest of the market on notice,” Gartner analyst Bob Hetu tells Wingfield and Gelles about Amazon’s announcement on pricing.

Indeed, “this is just the beginning,” the companies promised yesterday while outlining some additional synergies.

“Amazon and Whole Foods Market technology teams will begin to integrate Amazon Prime into the Whole Foods Market point-of-sale system, and when this work is complete, Prime members will receive special savings and in-store benefits,” according to the news release. 

“Amazon Prime will become the de facto loyalty program at Whole Foods once the integration is more advanced,” writesForbes contributor Laura Heller. “Whole Foods store brands including 365 Everyday Value, Whole Foods Market, Whole Paws and Whole Catch will become available through Amazon.com, AmazonFresh, Prime Pantry and Prime Now. More reasons for customers to join Prime, pay the annual fee and become loyal Amazon shoppers.”

That’s a key driver behind Amazon’s interest in the bricks-and-mortar operation which, as the WaPo’s Halzick wrote last April, “has known for some time that it is a business in need of course correction.”

One major problem has been Whole Foods continued high prices in the face of “increasing competition and market saturation” for organic and good-for-you fare, as Panos Mourdoukoutas pointed out in Forbes in February.

Leave it to Bezos & Co. to decide to try to turn that negative upside down and make it into a positive.

“We’re determined to make healthy and organic food affordable for everyone. Everybody should be able to eat Whole Foods Market quality — we will lower prices without compromising Whole Foods Market’s long-held commitment to the highest standards,” says AmazonWorldwide Consumer CEO Jeff Wilke in the release. 

And, as prices go down, the lure to join Amazon Prime goes up.

“Despite its massive success, Amazon Prime hasn't been able to solve one nagging problem: its heavy concentration in high-income households,” points out Eugene Kim for CNBC.com. “But Amazon's decision to lower prices at Whole Foods could help draw more lower and middle income people to its Prime program, as they will feel more compelled to check out the grocery store — and ultimately find out about the many benefits of the Prime program.”

“Amazon's trying to cast as wide a net as possible,” R.W Baird analyst Colin Sebastian tells Kim. “They're going to try to make more store shoppers Prime members, and then bring more Prime members into stores.”

Where’s Whole Foods Market co-founder and John Mackey in all this? Back at company HQ in Austin, Tex., where he will remain in charge. 

“We can’t wait to start showing customers what’s possible…,” he says. Many a shopkeeper will be watching, anxiously, too.

 

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