Whole lot of price cuts are just the beginning
On Kensington High Street, Whole Foods’ vast shop windows reveal little about its new $453bn (£350bn) owner. Instead of Amazon’s name being splashed across the windowpanes, the shopfront is still dedicated to bright displays featuring smoothies and chickpea-based snacks. So far, so familiar for those used to the upmarket grocery store.
But walking through the doors, there are fresh signs of the online giant at work. A Trojan horse celebrating the Whole Foods takeover in the form of an Instagram-friendly “unicorn cake” lures in a gang of 15-year-olds, who pose holding brightly coloured meringues before splashing their pocket money on Beyonce’s preferred brand of watermelon water.
A few feet away, a giant sign reads “Farm Fresh, Pick of the Season”. But rather than bundles of kale or punnets of strawberries underneath there is a pyramid display of Amazon’s inedible Echo dot speakers at the reduced price of £44.99. Shopper Istvan Ferrier, a postgraduate student, inspected one of the Echo boxes as he might check a peach for bruising. “It’s the first time I’ve ever seen anything electrical or anything other than food on this floor, but if Amazon can bring its delivery service to Whole Foods’ quality, then that could be quite powerful,” he said.
It’s a neat summary of why investors in Britain’s biggest food retailers have been so rattled by the Whole Foods takeover, despite the chain having just nine shops in the UK.
While the Sainsbury’s, Tesco, Morrisons and Marks & Spencer share price falls over the past few days were initially blamed on the threat of Amazon slashing prices on staple goods, the market is only starting to price in the damage the online giant can do if it can use its wealth of customer data to shake up the grocery market. The online giant is already adding Whole Foods products to its Prime and Amazon Fresh services, broadening its online grocery offer.
Amazon’s immediate effort to slash prices is a swift attempt to steer Whole Foods away from its derisive “Whole Paycheck” moniker in the US. The level of aggressive price reductions has surprised many industry experts. In the UK, organic Fairtrade bananas are now almost a third cheaper, down to £1.20 a kilogram, organic gala apples are 37pc less at £2.50 per kg, sirloin steaks have been lowered by 16pc to £24.99 per kg. However, while Whole Foods can now boast of beating the major supermarkets on price, it is on just a handful of items – the rest of Whole Foods’ store is dedicated to products with aspirational pricing.
Whole Foods is known for its eye-wateringly expensive health food supplements, ready-sliced vegetables, pressed juices and muesli mixes, and that is unlikely to change overnight. One mother of four young children I spoke to said she hoped that the prices would come down, revealing that she sometimes spent up to £400 on one trip for her family of six, but worried that the quality could be affected.
Throughout Whole Foods’ stores are banners promising shoppers that the changes made by Amazon are “just the beginning”. Those words are an icy warning to the supermarkets.
Amazon has shown time and time again how it is happy to sacrifice profits at the expense of sales growth, and reducing prices has always been its way of eroding competition.
In the UK, the major supermarkets wield enormous purchasing power, which they have exploited to undercut so many local retailers. But following a vicious price war with discounters Aldi and Lidl, and rising store costs, supermarket profit margins are now at the lowest they have ever been. They cannot afford a new rival on the scene.
But it’s unlikely Amazon will win in the supermarket aisles. Instead, Whole Foods’ stores will become showrooms for Amazon’s online dominance.
Amazon is looking at what its biggest online rival, China’s Alibaba, is doing by investing $8bn in bricks-andmortar retailers and privatising a luxury shopping mall. Alibaba is pioneering its “New Retail” strategy, which blurs the boundaries between physical retailers and online muscle by manipulating consumer data to improve retailers’ product offers and boost sales.
This is what Amazon hopes to do with Whole Foods. If Amazon can show that it can boost sales at physical stores through its tight grip on consumer data and sell payment solutions, or other services, to businesses, the Whole Foods deal suddenly won’t just help its Prime offer – it will bolster its business platform, Amazon Web Services, the profits of which were more than triple its retail business last year. Suddenly, aggressively cutting the price of a few groceries doesn’t look so bananas.
‘If Amazon can bring its delivery service to Whole Foods’ quality, it will be powerful’