By Laura Stevens and Heather Haddon
Amazon.com Inc. on Monday put itself in the unusual position of
being a first-mover on price cuts when it slashed the sticker price
on more than 100 items at Whole Foods Market Inc., many by more
than 30%.
Amazon typically relies on algorithms that scrape competitors'
prices before automatically matching or narrowly undercutting them
on its website. It focuses on items that are most popular on the
site and that drive traffic, according to former executives in
Amazon's retail divisions. That gives the retail giant a reputation
for having the lowest prices, part of its strategy of driving more
shopper traffic.
With Whole Foods, which it officially acquired Monday for about
$13.5 billion, Amazon has broken with its reactive approach. For
example, a dozen organic eggs was for sale at a Chicago store for
$3.99, compared with $4.39 the day before and lower than the $4.19
that Mariano's, a division of Kroger's Co., was charging at a
nearby store.
The price cuts could partly be a marketing stunt to mark
Amazon's ownership of the chain. But they also shed light on how
the company is adapting its strategy to seek success in the
physical retail world it has long disrupted.
The cuts could improve Whole Foods' reputation for high prices
and lure more shoppers into the chain's 470 stores. They also offer
a first sign of Amazon's intent to apply order to Whole Foods'
decentralized structure. Prices had varied across the grocer's 12
regions, but Monday's reductions brought those of the selected
items in line nationally.
"This will make me come more," said Jen Harris, 33 years old,
who skipped her Sunday shopping trip in favor of stopping by Monday
morning, looking for cheaper prices on staples like chicken and
fish. "I feel like Amazon is great for customers."
The occupational therapist from Chicago typically shops for
milk, eggs and snacks at Trader Joe's, Costco Wholesale Corp. or
Albertson Cos.'s Jewel-Osco banner because they are cheaper.
Amazon's strategy of being a price follower, not a price leader,
has helped make Amazon a major player in everything from books to
apparel.
"They can be a cent below the other competitors, they don't need
to go all the way down," said Guru Hariharan, chief executive of
retail technology company Boomerang Commerce and a former Amazon
manager.
Grocery shoppers typically enter a store with a set list of
items but often make impulse purchases once there. Customers at
Whole Foods in particular are generally more focused on quality and
less price conscious, making it tougher for Amazon to predict how
discounting products may affect traffic. Whole Foods, for example,
began cutting prices two years ago, but the cuts didn't
reinvigorate sluggish sales growth.
Whole Foods has some way to go to match other grocers. Analysts
estimate that prices before the Amazon takeover were roughly 15%
higher than conventional competitors for similar items.
"Amazon cutting prices at Whole Foods likely doesn't mean
undercutting other grocers, but rather bringing prices more in line
with average market prices," said Forrester retail analyst Brendan
Witcher.
For example, Amazon cut the price of Whole Foods' private-label
creamy and crunchy almond butters to $6.99 from $7.99, matching
Trader Joe's.
A Whole Foods spokeswoman said that many store items couldn't be
directly compared with competitors because the chain has higher
quality and ethical standards. The price cuts and promotions will
continue in the weeks to come as the merger progresses, she
said.
"This is just the beginning," she said.
Amazon declined to comment on its pricing policies, but the
company has previously said it finds the lowest prices and meets or
beats them every day.
Traditional grocers are generally more low-tech in their
approach to pricing, in part because it is difficult to measure
prices that can vary by region and store. Supermarkets generally
survey prices among competitors in regional markets and use those
to inform how much they can charge for goods. They pay special
attention to staples such as milk, eggs and bananas, as customers
often know how much those cost across grocers.
Investor concern that Amazon's price cuts at Whole Foods will
trigger a price war led to a stock selloff among traditional
grocers Monday, continuing last week's slide. Sprouts Farmers
Market Inc.'s stock tumbled 10%, while Natural Grocers by Vitamin
Cottage Inc. was down by more than 2%. Kroger, the largest U.S.
grocery chain by stores and revenue, slipped 1.4% before largely
recovering, while Wal-Mart Stores Inc.'s shares slid slightly.
Shoppers entering Whole Foods on Monday were greeted by signs
marking lower prices. A survey of items marked with cuts at Whole
Foods stores in Brooklyn and California showed prices were down by
around a fourth, according to J.P. Morgan.
At a Whole Foods in Chicago, some of the steepest cuts were in
the fish and meat department, with rib-eye reduced to $13.99 a
pound from $18.99 and salmon fillets dropping to $9.99 a pound from
$12.99.
In a nod to mainstream shoppers, a box of General Mills-branded
Cheerios was cut to $2.99 from $3.99. (The same-size box of
Cheerios from AmazonFresh, the retailer's online grocery offering,
costs $2.89.)
When Amazon does decide to lead on price cuts, they often affect
its private-label brands on items like batteries or bras. In Whole
Foods, that translated to lower prices on items like butter under
the 365 Everyday Value in-house brand.
Amazon also sometimes leads on devices like its Kindle e-reader
and Echo speaker device where there are few clear rivals. On
Monday, the Echo was for sale in Whole Foods at a discounted rate
of $99.99, compared with the usual price tag of $179.99. The
company's smaller Dot version was $5 off at $44.99. They were also
offered at the same prices on Amazon's site.
Ultimately, while Amazon invests for the long term and typically
operates on razor-thin margins, it does aim for profitability,
according to the executives.
For now, the decision to cut prices on just a few items is
unlikely to massively change shopper behavior, analysts said.
"Two dozen items isn't going to necessarily compel the average
Joe to go into a Whole Foods," said Christopher Mandeville, a
senior analyst at Jefferies. "This may just narrow the gap."
--Annie Gasparro contributed to this article.
(END) Dow Jones Newswires
August 28, 2017 17:47 ET (21:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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