Amazon to shake up industry with Whole Foods price cuts
Online retailer plots a speedy grocery takeover
SEATTLE — Attention all shoppers: The era of Whole Paycheck, a widely used nickname for upscale grocer Whole Foods, may be drawing to a close. Amazon takes control of the chain Monday and intends to slash prices the same day.
The significance of the move goes well beyond the price of organic avocados, baby kale and rotisserie chickens, all of which will cost less Monday than Sunday. Rather, it is an outsize way for Jeff Bezos, Amazon’s chief executive, to announce his plan to shake up the grocery industry and take on competitors like Walmart and Kroger.
“This is how Amazon operates,” said Michelle Grant, head of retailing at Euromonitor, a market research firm. “It’s all about speed, speed, speed.”
In the past, Bezos has been willing to lose money — and disappoint some shareholders — to gain customers. In 2010, for ex-
ample, he slashed the price of diapers to compete with Diapers.com, which he eventually bought.
Amazon plans to weave together its online business and physical stores by turning its Prime membership program into a Whole Foods rewards program, providing additional savings to customers. Amazon Prime is a $99-a-year service that gives customers faster free shipping, video streaming and other benefits.
Whole Foods’ privatelabel products will be available through Amazon’s online services and Amazon lockers that will be installed in some Whole Foods markets. Customers will also be able to return online orders to Amazon through the lockers.
“We’re determined to make healthy and organic food affordable for everyone,” Jeff Wilke, the executive who runs Amazon’s consumer businesses, said Thursday. “Everybody should be able to eat Whole Foods Market quality.”
Price wars
Discounts are not the only reason shoppers use Amazon — selection and convenience are others — but Bezos has never been shy about starting price wars that inflict pain on rivals. In the 1990s, the company tussled with Barnes & Noble to see which could discount books the most. Amazon and Walmart have been in an on-and-off price war in a variety of categories for years.
In its battle with Quidsi, a startup that owned Diapers.com, Amazon put so much pressure on the company that it eventually agreed to be acquired by Amazon rather than by Walmart.
Ever since Amazon made the stunning announcement in June that it was acquiring Whole Foods for more than $13 billion, competitors have expected it to shake things up at the grocer, which has struggled in the face of competition from Costco, Walmart and others that have wooed customers with a growing selection of organic produce and kitchen staples.
Still, the speed with which Amazon completed the acquisition and embarked on a price-cutting campaign is stunning. Amazon finalized the purchase in less than three months — unusual for a multibillion-dollar transaction, with the Federal Trade Commission only approving the deal on Wednesday.
“I absolutely think it’s putting the rest of the market on notice,” Bob Hetu, an analyst at Gartner, the technology research firm, said of Amazon’s announcement on pricing.
Investors drove Kroger shares down more than 8 percent Thursday; shares of Walmart, the nation’s biggest grocer, fell about 2 percent. Both companies’ shares also fell sharply when the deal was announced in June.
Amazon did not say how much it would cut prices in Whole Foods stores, 460 of which are spread across the United States, Canada and Britain. It promised there would be further cuts in the future. People who have studied Whole Foods’ struggles in the marketplace said the reductions would have to be substantial to compete with other stores.
“I believe what we will see is Amazon and Whole Foods becoming aggressive on price,” said Brittain Ladd, a strategy consultant who previously worked for Amazon on its grocery business. “I won’t be surprised if some prices are lowered 15 percent to as high as 25 percent in some categories.”
Wilke of Amazon said in his statement that lowering prices would not compromise the quality of products at Whole Foods, the brand’s main selling point. The items the company said it would drop prices on products including bananas, butter, crunchy almond butter, organic large brown eggs, responsibly farmed salmon and tilapia and organic Fuji apples.
Opposite corners
A number of groups, including members of Congress and representatives of organized labor, have raised concerns about how the acquisition may affect competition in the grocery business, but the Federal Trade Commission had no trouble with it.
Antitrust lawyers noted that Amazon and Whole Foods are relatively small players in the grocery business and in different corners of the market — Amazon in online grocery delivery and Whole Foods in physical retailing.
Those arguments will probably not assuage a growing chorus of Amazon critics who believe it is developing too powerful a grip on retail spending, at least on the internet. Yet Amazon’s announcement of immediate price reductions on groceries underscores how the company has managed to say on the right side of regulators.
“At the end of the day, the FTC is in the business of watching out for the consumer,” said Brendan Witcher, a retail analyst at Forrester Research.
It remains to be seen whether the deal will revive Whole Foods’ fortunes or becomes a costly move into an industry that Amazon has failed to master. Amazon has offered its own internet grocery business, AmazonFresh, for a decade, but has had little impact on the habits of consumers, who overwhelmingly prefer buying their groceries in stores.
Amazon is experimenting with automation technologies that could save costs in physical stores by eliminating cashiers, but it has vowed not to use those technologies at Whole Foods to lay off workers. But sharp price cuts on items in stores will put pressure on Amazon to find cost savings elsewhere at Whole Foods, analysts said — for example, by making the logistics network that delivers goods to stores more efficient.
After the companies combine, Amazon’s competitors in the grocery business will still be vastly larger. Walmart has more than 4,600 stores and last year started making a multibillion-dollar investment in lowering grocery prices. Walmart has also significantly increased its investment in online shopping through acquisitions to better compete with Amazon on its main turf.
Online presence
And this week, Google announced an agreement with Walmart that would allow people to buy Walmart items through Google Express, an online shopping mall that has sought, without much success, to compete against Amazon.
“We feel great about our position with our network of stores around the country and fast growing e-commerce and online grocery businesses,” said Randy Hargrove, a spokesman for Walmart.
Local grocers expressed some trepidation about Amazon’s aggressive entry into their business, but said it was part of a long history of upheavals and competition.
Stew Leonard Jr. is chief executive of Stew Leonard’s, a chain of six grocery stores in New York and Connecticut that focus on fresh produce. There are several Whole Foods close to his stores, and Leonard said he had been watching the Amazon deal closely.
“I’ve been in retail since I was a kid, and I’m always nervous,” he said. “Costcos were opening, then Walmarts, then Whole Foods. But at the end of the day, you just have to try and get the freshest corn out there on the sidewalk.”