A day after Amazon revealed its plans to cut prices at Whole Foods Market following the completion of its takeover on Monday – an announcement that obliterated billions of dollars’ worth of food suppliers and rival grocers’ market capitalization - Bloomberg is reporting that WFM’s rivals are mulling an incredibly difficult choice: Whether to follow suit and cut prices in one of the few segments of the food market that’s actually growing, or hold the line against their high-tech rival and risk being undercut into oblivion.
Price reductions could draw in new customers to brick-and-mortar locations. However, already thin profit margins and technological barriers make lowering prices a risky proposition.
“…the price reductions could draw in curious new shoppers and present brick-and-mortar retailers with a dilemma. Do they follow suit and see their margins squeezed, or hold fast and risk sacrificing sales in one of the few areas of the food industry that’s actually growing?”
Greg Portell, a partner at consulting firm A.T. Kearney, said that it will be difficult for rivals to match Amazon’s “dynamic” pricing model.
“Changing prices across the board is not a simple process for most retailers,” said Greg Portell, a partner at consulting firm A.T. Kearney. “It takes time and labor. What Amazon has done is bring a level of dynamic pricing that will have to be matched by anybody selling food. It will disrupt the way the sector works.”
Amazon’s decision to slash prices of organic food products marks a new chapter in the grocery price war, which had previously been fought over more mainstream products.
“Up until a couple of years ago, the grocery price war had largely been fought over mainstream products like soda, soup and cereal, leaving higher-end organics to compete on quality. Organic products still have fatter margins, giving Amazon more room to experiment on pricing.”
The e-commerce giant has another crucial advantage over its rivals: Its investors don’t expect it to turn a profit – at least not right away. This allows the company freedom to “tinker” with prices, according to Bloomberg.
“Amazon is less constrained by profit expectations thanks to a tech-industry ethos that values growth above everything. So it can tinker with the prices of organic eggs, almond butter and rotisserie chicken, experimenting with what gets customers to respond and then doubling down on those successful bets.”
Ken Harris, managing partner at Cadent Consulting Group, said that Amazon’s ability to bring “21st-century technology” to the neighborhood grocery will have a “profound” impact on the industry.
“When you think about Amazon’s dynamic pricing, it is taking a 21st-century technology and putting it in front of consumers in a new venue,” said Ken Harris, managing partner at Cadent Consulting Group. “Consumers have come to expect it in other places but not their neighborhood supermarket. So it’s profound, and other retailers have to take notice.”
Ironically, Amazon is using the same strategy against WFM’s competitors that they once used to undercut the organic foods pioneer. After WFM popularized organic foods in the US, Wal-Mart and other mainstream grocers started stocking similar items and selling them for less.
“For years, organic food was a niche category, but Whole Foods showed there was growing demand as it opened more than 400 stores across the country. Eventually, major chains like Wal-Mart and Kroger responded by stocking more organic items. U.S. consumers bought more organic fare than ever before in 2016, with sales increasing 8.4 percent to $47 billion and accounting for more than 5 percent of all food sales in the country, according to the Organic Trade Association.
But as organics became more widespread, the traditional supermarkets undercut Whole Foods on price, and the chain’s same-store sales have fallen for eight straight quarters as it struggled to respond. It introduced a new store format called 365 that offered less expensive items to attract younger, budget-conscious shoppers. But the declines continued, and the company had only opened a handful of 365 locations before Amazon pounced in mid-June.”
Another huge advantage for Amazon is that it can offer steep discounts to members of its Amazon Prime service. The company should have little trouble cross-selling to its dedicated Prime members because, according to Bloomberg, nearly two-thirds of WFM’s customers are already Prime subscribers.
“Amazon will speed those efforts by layering on discounts for Prime members, who are typically shopping at Whole Foods already. Nearly two-thirds of Whole Foods’ regular customers are Prime members, according to retail consultancy Magid.
“Whole Foods customers are very Amazon-savvy,” said Matt Sargent, Magid’s senior vice president of retail. “That’s a good thing but with this deal, Amazon bought the same customers it already had. So they have to expand beyond current Whole Foods customers by offering more value.” Whether Amazon can convert those value-seekers into long-term customers will be the challenge, Barthashus said.”
However, Amazon’s decision to slash prices so rapidly could backfire. The company could face scrutiny from regulators if it fails to keep its online and in-store pricing tags in sync.
“If the retail giant is unable to move quickly enough to adjust price tags in the store to reflect the discounts it’s advertising, the company could get called out by watchdogs and even fined by federal trade regulators, according to Cadent Consulting’s Harris.
“There are huge risks,” he said. And even with all this attention, Whole Foods is still a small player in the U.S. grocery market compared with Wal-Mart and Kroger, who together garner more than 30 percent of sales.”
Amazon said in a press release Thursday that "starting Monday, Whole Foods Market will offer lower prices on a selection of best-selling staples across its stores, with much more to come. Customers will enjoy lower prices on products like Whole Trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85% lean ground beef, creamy and crunchy almond butter, organic Gala and Fuji apples, organic rotisserie chicken, 365 Everyday Value organic butter, and much more."
After the announcement, shares of WFM rivals like Wal-Mart and Kroeger's tanked, along with shares of WFM's suppliers.
If Amazon's track record is any indication, even if its rivals resist cutting prices right away, they likely will be forced to in the near future, ushering more of the deflationary pressures that the Fed and academic economists hate so much.