Amazon’s move to cut prices by 20 percent on more than 500 products at Whole Foods on Wednesday is not its first attempt to purge the “Whole Paycheck” nickname. But it may be the most significant.
When Amazon bought Whole Foods for nearly $14 billion in 2017, the company cut prices on more than 100 items in “the price cuts heard round the world,” according to Neil Stern, retail consultant for McMillanDoolittle. The aim was to reposition the grocery chain’s reputation from a retailer with outrageously high prices to one with just high prices.
“Amazon inherited the problem and all the stereotypes associated with it,” Stern says. “They’ve been trying to democratize Whole Foods.”
Amazon’s hope was to achieve this via Amazon Prime: For an annual fee of $119, Prime customers could get a further 10 percent discount on sale items. Analysts say that the Prime push has not meaningfully changed Whole Foods’ sales course.
(Amazon founder and chief executive Jeffrey P. Bezos owns The Washington Post.)
And so, if Amazon Prime did not significantly drive traffic to Whole Foods, perhaps the inverse is possible, and Whole Foods could drive customers to Prime?
“What’s driving the price cuts is to drive more traffic into stores and (in turn) to lock more people into that Prime membership,” says Brian Yarbrough, consumer research analyst at Edward Jones. “There are a lot of Whole Foods foodies who are hardcore. But to get it to the masses, the price points are high. Some are 40 and 50 percent above what you’d see at a Costco or Sam’s Club. That’s where they’ve run into a problem.”
In a statement from John Mackey, the chief executive of Whole Foods, the company committed to a continued focus on both lowering prices and “bringing customers the quality they trust and the innovative assortment they expect from our brand.”
But if Whole Foods stocks 30,000 items, which 500 to discount is strategic. Given Amazon’s rigorous commitment to data, we can assume the 500 items discounted were very strategically chosen.
Stern says a retail term is “known value items,” the products that disproportionately drive customer’s price-value perception: a gallon of milk, a dozen eggs, the things for which the average consumer may have a ballpark dollar figure in mind.
For Whole Foods, this could mean fancy antibiotic-free free-range chicken. And indeed, that’s the case (air-chilled, no-antibiotics-ever whole chicken sees a price cut of more than 40 percent to $1.79 a pound; fresh, sustainable wild-caught halibut fillet drops more than 35 percent to $16.99 per pound; organic asparagus falls to $2.99 a pound).
Historically, Whole Foods justified higher prices with its commitment to quality: “Our chicken is better, so it costs more,” explains Josh Lowitz of Consumer Intelligence Research Partners.
He draws parallels between this Amazon decision and Walmart’s pricing rationale in the 1990s. Walmart put products on the shelves at a lower cost than Kmart to become the preferred place to shop.
“My perspective is that Amazon is a really efficient retailer. One thing efficiency allows you to do is lower prices. With Whole Foods, their only grocery presence, they want to make it as accessible as possible.”
Amazon is planning to open dozens of its own grocery stores as early as next year, according to news reports, with signed leases in cities such as Chicago, Philadelphia, San Francisco, Seattle and the District.
These Whole Foods cuts may play into market positioning for Amazon’s more mainstream grocery ambitions, says Stern, but it’s unlikely that Whole Foods will ever be in a position to compete on price in the increasingly crowded grocery space. Whole Foods is expensive to operate, and, more important, its commitment to clean ingredients is limiting.
“They are never going to have the items that directly compete with Walmart — there’s no Diet Coke, no Tide. By having those standards, it keeps them away from those core mainstream products.”