Consumer

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

Sorry, supermarkets: Amazon.com Inc. just confirmed that your worst nightmares are about to come true.

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.

On Thursday, we achieved some clarity. Amazon announced that it would start cutting prices at Whole Foods on Monday, making an immediate bid to solve a problem that has plagued the grocer for ages: Its prices are simply uncompetitive now that it is far from the only organics game in town. Wal-Mart Stores Inc., Target Corp. and Kroger Co. are all in the organics business now, and shoppers have noticed.

The move suggests that Amazon is ready to do what it has done in so many other corners of the retail business: Hustle after market share and worry about profit later. Two of Amazon's immediate techniques with Whole Foods show the Seattle company's particular brand of ruthless genius.

The Low Price Halo: Amazon employs a clever trick with its online shopping mall that it seems to be bringing to Whole Foods, too. The company's prices aren't necessarily the lowest across the board. But Amazon carefully picks and chooses some popular or highly visible products and cuts their prices to the bone. That gives Amazon the reputation of having the lowest prices around.

Profit Is Relative
The grocery business is notorious for razor-thin profit margins, but Whole Foods has better operating margins than its new owner
Source: Bloomberg

The company's announcement on Thursday said that it would cut prices on a "selection of best-selling staples" at Whole Foods, including bananas, organic avocados and ground beef. Again, Amazon doesn't need to have the lowest prices on everything, just the items that grocery shoppers are most likely to plop into their carts. That will make Whole Foods seem like a better bargain, even if it's not. 

Supermarkets have long done this, of course, by offering cheap prices on milk or bread to bring people into their stores. Amazon is likely to take this to the next level, and the price chopping no doubt will force other grocers to follow when prices are already ultra-low. Members of Amazon's Prime shopping club will also have new reasons to shop at Whole Foods. The company plans to make Prime the de facto loyalty program for Whole Foods, too. That instantly gives the grocer the mother of all store-loyalty programs.

The War to the Door: Amazon has already shown signs of using its growing number of book shops, university stores and grocery kiosks to solve the tricky and expensive problem of delivering packages. Whole Foods is now part of the strategy, too. The company's announcement said that it would install lockers in "select" Whole Foods stores, turning them into mini package pickup centers so Amazon online customers can pick up orders at Whole Foods or return merchandise there. These self-delivery options are particularly important in cities where people can't have packages left on their doorsteps while they're away.

Deliverance
Amazon's costs for deliveries have been climbing faster than its revenue. That has meant the company is spending a higher percentage of its sales on the costs of delivering merchandise.
Source: Amazon

The same motivation was behind Amazon's announcement last week that it would begin using some of its existing storefronts -- starting with five Amazon locations on or near college campuses -- into package pickup spots for orders customers need in a matter of minutes. Amazon is catching onto something traditional store retailers noticed long ago: Consumers want choices. Yes, sometimes they want to buy something from their sofa and wait for it to be delivered to their homes. But sometimes they like to order online and then pick it up whenever they want. And turning people into their own FedEx delivery person is cheaper for the company, too. 

As Amazon rolls out these grocery plans, some traditional sellers look better suited to absorb the shock than others: Wal-Mart has been girding itself to play defense in the food business for some time now, investing in programs such as online grocery pickup and working to improve its assortment of fresh produce and vegetables. Aldi and Lidl have plenty of experience fighting in the low-price trenches. However, Kroger in particular doesn't seem to have a clearly defined plan to help fend off this new pressure. Investors know it, and that's why they've punished its stock so hard since the deal was announced.

That Darn Bezos
Shares of Kroger and other grocery chains got hit by news of Amazon's immediate plans for Whole Foods
Source: Bloomberg
Intraday times are displayed in ET.

Regardless of their preparedness, all of these grocers should buckle up: Amazon clearly has put market share on its shopping list, and it could come at any of their expense. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Sarah Halzack in Washington at shalzack@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net