When Amazon announced that it was purchasing Whole Foods, it also nearly immediately announced a big change: The prices at the high-end grocer popularly known as “Whole Paycheck” would drop as soon as the merger was complete. A bunch of organic kale would cost less on Monday than it did on Sunday, simply because on Monday, Amazon would own the grocery chain.
The reasons for this announcement and strategic move are varied, but most observers believe that the primary driver is Amazon’s determination to outcompete every other retailer in the market. By announcing the price cuts in advance and lowering the costs required for customers to shop at the popular grocer, Amazon is “putting the rest of the market on notice” that they will need to do better if they hope to survive. Almost immediately, the stock prices of competing retailers such as Kroger and Walmart plummeted, as investors predicted their impending struggles.
The shot over the bow also gives Amazon a way to reestablish its dominance. The proposed merger was announced only in June, then completed by the end of August. Such speed is central to Amazon’s competitive advantage; any move it makes, it tries to get there faster than others might. As a result, Whole Foods–branded private labels appeared almost immediately on Amazon’s sites. The company also is considering whether to install Amazon lockers in Whole Foods locations, so that online shoppers can pick up their Amazon orders at the same time they stop by Whole Foods to grab something for dinner.
To integrate the businesses, Amazon also will introduce a Whole Foods–related rewards program for its Prime members. That is, Prime members will enjoy added discounts at Whole Foods, which Amazon hopes will expand the market for organic products to people who might not have been able to afford them previously. Such market expansions are necessary, especially considering that both Amazon and Whole Foods—regardless of their well-known names—still account for relatively small portions of the grocery market.
In response to the merger, Google also announced that it would be entering into a new collaboration with Walmart, giving customers a means to purchase items from Walmart through its Google Express mall function. In the meantime, Walmart itself has invested heavily in its online operations, while also persisting in its famous efficiency efforts to keep its prices as low as possible.
However, other companies that have tried to fend off Amazon in the past, such as Barnes & Noble and Diapers.com, might suggest that these efforts appear doomed to fail. Amazon moves fast, is willing to lose some money in the short term, and already enjoys massive appeal among its loyal customers. If it keeps offering more benefits to those shoppers, is there any stopping it?
- How much of an effect will Amazon’s purchase of Whole Foods have on prices at Whole Foods? What about the prices at competing grocery retailers?
- Is Amazon’s competitive advantage sustainable
Source: Nick Wingfield and David Gelles, “Amazon’s Play to Rattle Whole Foods Rivals: Cheaper Kale and Avocado,” The New York Times, August 28, 2017