Months before Amazon announced it would be shelling out $13.7 billion for Whole Foods Market, the grocery chain made a surprise announcement of its own: It would begin lowering its prices.
The April announcement was born of necessity. Whole Foods was experiencing the longest sales slump since going public in 1992, and investors had begun pressuring the company to rethink its strategy.
The high-end grocer has long resisted lowering its prices, which has earned it the nickname “Whole Paycheck.” The few times it has, analysts say results have been spotty, sending profit margins lower without driving up volume.
“The reductions have, quite honestly, been haphazard and they’ve done very little to change peoples’ perception of the company,” said Neil Saunders, managing director of GlobalData Retail in New York. “This has been a perennial problem for Whole Foods with no good solution.”
Until now, he says. This week, Amazon — which plans to finalize its takeover on Monday — announced its first course of business would be to immediately slash prices on key groceries, including bananas, avocados and eggs. (Jeffrey P. Bezos, the founder and chief executive of Amazon, also owns The Washington Post.)
“We’re determined to make healthy and organic food affordable for everyone,” Jeff Wilke, chief executive of Amazon Worldwide Consumer, said this week. “We will lower prices without compromising Whole Foods Market’s long-held commitment to the highest standards.”
It was an obvious move, analysts say, but also a symbolic one. Whole Foods has had a complicated relationship with its prices — executives have long maintained they charge a premium because they sell superior products to those of their competitors — even as consumer and investors have been outspoken about company’s premiums in a famously low-margin business. Back in November, chief executive John Mackey had told investors he was “not participating in a race to the bottom” by cutting prices.
But the high prices have also allowed Whole Foods to enjoy higher profit margins than its competitors. In the most recent quarter, for example, it had a profit margin of 2.9 percent, compared with 0.8 percent at Kroger and 2.4 percent at Costco. (Two years ago, however, Whole Foods had a profit margin of 4.2 percent.)
The prospect of declining profit margins is less of a problem, analysts say, for a technology giant like Amazon, making it possible for the Seattle-based company to double down in ways Whole Foods couldn’t on its own. “The difference is, Amazon doesn’t really care about its margins very much — and neither do its investors,” Saunders said. “Longer term, they know Amazon’s deep cuts will lead to more shoppers.”
The company plans to begin selling Whole Foods’ private-label brands through its website, was well as its AmazonFresh, Prime Pantry and Prime Now programs, beginning Monday.
But the challenge, some say, will be preserving Whole Foods’ high-end image while lowering its its prices and making its its products widely available.
“That’s the thorny problem Amazon faces: How do you become a low-priced supermarket and still retain that cachet?” said Jeffery Inman, a marketing professor at University of Pittsburgh and president of the Society of Consumer Psychology. “They’ve got to figure out how to toe that line.”
A year ago, Whole Foods opened its first lower-priced concept with a smaller store footprint called 365 by Whole Foods, to help the company’s “price image.” Initial tests had been successful, executives said. The company also said it planned to cut $300 million in costs, in part by rethinking its labor scheduling technology.
“You have to be price relevant, and nobody wants to feel like they’re being cheated,” Mackey said in a call with analysts in February. “And so does Whole Foods need to be the cheapest or least expensive retailer out there? No. But we also can’t have too big of a gap, or people will feel like we’re trying to take advantage of them.”
But even closing that gap, as Amazon plans, may not be enough to turn things around overnight, analysts say.
“Everyone thinks the sky is going to fall Monday because Whole Foods is lowering its prices on milk and eggs,” said Michelle Grant, head of retailing at Euromonitor International, a London-based market research firm. “But people have their own routines and habits. It’s a very competitive market.
“How many eggs are you really going to eat?” she said. “Just because it’s cheap doesn’t mean you’re going to hoard milk and avocados.”