Whole Foods’ Lower Prices to Affect Everyone
Amazon says it is going to slash the price on a basket of items ranging from organic Fuji apples to “responsibly-farmed” tilapia but hasn’t specified by how much.
Yet the idea that the upscale natural-foods-oriented chain with an outsized reputation for hefty price tags — remember its derisive moniker: “Whole Paycheck” — is charging less has consumers and the grocery industry consider the impact this price-trimming will have on pocketbooks, shopping patterns and competitors.
Here’s a breakdown of the Seattle-based Internet titan’s inaugural Whole Foods move:
How is Amazon able to lower prices at Whole Foods?
The mechanics of the change are simple: Amazon has a huge supply chain that can streamline delivery like few others. The company’s size also gives it tremendous buying power when negotiating with those making the products it’s selling.
“Amazon will certainly be able to extract more value from its supply chain by combining the scale it has from its own massive logistics operations along with the infrastructure of Whole Foods,” said Forrester technology analyst James McQuivey.
“They’ll be able to reduce prices purely through logistics.”
That also likely means the price cuts on select items aren’t a quick gimmick to get people into Whole Foods’ more than 460 stores, but a long-term approach.
“The (profit) margins at Whole Foods probably were too high,” said Jeff Roster, vice president of retail strategy at the IHL Group, a research and advisory firm based in Franklin, Tenn. “‘Whole Paycheck’ wasn’t just a meme. It was pretty darn accurate. There’s room to breathe.”
Will the quality of food be affected?
Whole Foods has always taken pride in offering top-of-the-line organic and natural foods.
Despite its reputation as a price cutter, Amazon risks alienating the devoted customers if it lowers quality at Whole Foods, a chain that built organic into a national trend that has seeped into traditional supermarkets.
One has her doubts, especially if Amazon’s price trims are more like slashes.
“It’s something I worry about,” said Lauren Beitelspacher, an assistant professor of marketing at Babson College. “If they lower price significantly, they’ll have to overcome a major hurdle with maintaining the quality.”
Are suppliers going to feel the pinch?
Unlikely, say some analysts.
“Amazon can lower prices without putting any pressure on suppliers,” said Bill Bishop, co-founder of Brick Meets Click, a retail consultancy headquartered in Barrington, Ill. “They probably don’t want to do anything to jeopardize the quality or brand value of Whole Foods.”
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“Anytime a $100-billion player comes in, they’re in the business of controlling costs,” Roster said. “The caveat to the vendors is: ‘We all expect Whole Foods probably grows.'” That means a bigger market for price-pressured suppliers.
Will competitors drop prices in response to Amazon’s move?
Shoppers shouldn’t expect a price war to break out. There’ll be no battle for the cheapest avocado. Traditional supermarkets are already dealing intense price-driven competition from all directions, including big-box Walmart, which is the largest grocer in the U.S, and a range of discounters and specialty stores.
“There’s already a price push across the board,” said McQuivey. “I don’t think it does anything to change the price strategy of other groceries, because they’re already under pressure,”
Rival grocers, instead, may skip price and make moves that pointedly separate themselves from Amazon’s Whole Foods.
“What’s you’re going to see now is grocery chains start to commit more locally,” said Beitelspacher. “They’re partnering with local farms and go back to being what Whole Foods was originally.”
They will more aggressively highlight special services, like personal shoppers, meal-planning help and offer in-store cooking demonstrations and wine tastings to lure shoppers into stores and away from ordering groceries online.
How did Amazon decide which Whole Foods items to discount?
The company declined to comment on why they included certain items and for now, are excluding others.
The list included Whole Trade bananas; organic large brown eggs, avocados, baby kale, baby lettuce and Gala and Fuji apples; “animal-welfare-rated” 85% lean ground beef; organic “responsibly-farmed” salmon and tilapia; creamy and crunchy almond butter; organic rotisserie chicken and house-brand organic butter.
The list is heavy on organic produce and proteins, Bishop noted, as if to underscore to the uninitiated what Whole Foods is all about — and to show where there’s profit margin-cutting wiggle room.
“These would be prices that when they drop them, they’d have the biggest impact,” he said.
What impact will this have on Whole Foods’ dedication to local farmers and suppliers?
Whole Foods’ crafted an ethos built around supporting local communities, environmental stewardship and what the chain calls “win-win partnerships” with its suppliers.
Amazon, not so much.
“It’s the biggest challenge,” McQuivey said. “It’ll put a strain on local sourcing and create potential bottlenecks.”
Some observers, like Roster, say they hope Amazon can live up to Whole Foods’ ideals, but “it’s always a problem when you have a $100-billion business that wants to improve margins.”