Retail stocks were routed on Thursday, August 24, as Amazon announced its plans to cut prices at Whole Foods, the grocery chain which the company bought for $13.7 billion. The Whole Foods acquisition is expected to close by Monday. Shares of retailers Walmart, Costco, Target and Kroger were hit hard, and the rout may continue as Amazon moves decisively into the grocery market.
“We’re determined to make healthy and organic food affordable for everyone. Everybody should be able to eat Whole Foods Market quality – we will lower prices without compromising Whole Foods Market’s long-held commitment to the highest standards,” said Jeff Wilke, CEO of Amazon Worldwide Consumer said in a press release.
Amazon is wasting no time with its plans to start cutting prices as soon as Monday, and the cuts cover a wide range of best-sellers. Amazon Prime will be ported to WFM customers as their rewards program as well.
Whole Foods has, so far, sat at the upper end of the grocery price spectrum, with a premium positioning focusing on higher quality and organic products. But given Amazon’s thirst for volume, there was little chance of keeping the status quo. The price cuts and resulting move in strategic positioning was always on the cards, and the steady growth of Walmart in the last few years would have only increased the pressure on Amazon to move the Average Selling Price at Whole Foods as low as it possibly can.
Amazon Worldwide Consumer CEO Jeff Wike has now made it clear that Whole Foods would lower prices starting on day one, and the biggest threat in that statement is their intent to keep lowering the prices over time. Though it will be a difficult task to achieve in a short period of time - as Amazon is relatively new to the grocery logistics game - cutting prices makes a lot of sense for Amazon.
For starters, Amazon chases volume and revenue, not operating margin and profits. Whole Foods occupies a very small share of market in the US grocery segment, holding less than 2%. Amazon definitely did not make the biggest acquisition in its history for a less than 2% market share. The obvious primary target will be Walmart, which sits pretty with more than one fourth of the US grocery market under its control.
Walmart has always positioned itself as the company where you can get the lowest price possible, and Amazon’s Whole Foods will never be able to compete on an even scale with Walmart if it continues with its premium positioning, which is good for the bottom line but bad for the top line.
"Amazon is reducing prices at Whole Foods in an attempt to dispel the 'Whole Paycheck' image many people have of Whole Foods as well as to lure middle and low income consumers to consider Whole Foods as a place to shop," said Brittain Ladd a former Amazon Fresh employee reported CNBC
So it absolutely makes sense for Amazon to push Whole Foods in that direction, but the fight between Walmart and Amazon is only going to put every body else in the market under an even tighter squeeze.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
