Amazon’s Price Cuts on Food Leave Rivals Bracing for Impact

  • ‘High-velocity decision making’ comes to grocery industry
  • ‘It will disrupt the way the sector works,’ A.T. Kearney says

Amazon Moves Quickly to Show Whole Foods Changes

A price war has raged in U.S. supermarket aisles for well over a year, bloodying retailers big and small. On Monday, Amazon.com Inc. plans to toss a smart bomb into the fray.

The online giant’s move to slash prices on everything from organic baby kale to fair-trade bananas on the same day its $13.7 billion acquisition of Whole Foods Market Inc. closes showed the “high-velocity decision making” Amazon founder Jeff Bezos claims as his hallmark, and sent shares of Kroger Co., Costco Wholesale Corp. and Wal-Mart Stores Inc. reeling Thursday. Amazon will also begin selling Whole Foods’ store brands on its site, install Amazon pickup lockers in some locations and meld its Prime program into the upscale grocer’s operations.

While this won’t exactly bring responsibly farmed salmon to the masses -- after all, Whole Foods stores will remain in high-rent neighborhoods -- 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?

“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.”

Kroger shares rose 2.8 percent on Friday after falling 8.1 percent Thursday, while Costco alternated between losses and gains following Thursday’s 5 percent decline. Friday, shares of Royal Ahold Delhaize NV, the Dutch company that operates the Giant Food and Food Lion chains, dropped as much as 7.6 percent in Amsterdam.

Even European companies with no ties to the U.S., such as Great Britain’s Tesco Plc and France’s Carrefour SA, saw their shares decline. Amazon said it would also cut prices in its 9 U.K. stores.

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.

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.

“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.”

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. 

That makes having Amazon behind Whole Foods all the more important, according to Jennifer Bartashus, an analyst for Bloomberg Intelligence. Even before the deal, the grocer was offering more discounts to combat its “Whole Paycheck” reputation and investing in a rewards program. 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.

Amazon’s rapid price moves could also backfire, some analysts said. 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.

Still, the brick-and-mortar crowd no doubt noticed Amazon’s ominous note that the price cuts were “just the beginning,” with more changes in the works. Bezos is fond of saying that it’s always “Day 1” at the online giant, a reminder to maintain the aggressive, risk-taking culture of the company’s inception.

On Monday, the supermarket industry will learn just what Day 1 means.

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