Analysis: price is merely the entry ticket for Amazon and Whole Foods

Analysis: price is merely the entry ticket for Amazon and Whole Foods
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Amazon’s drastic price cuts for Whole Foods are merely a first step in a larger conquest plan. Innovation is the real key, analysts feel.

Domino effect

The American media cannot stop talking about it: Amazon has kept its promise. The price cuts at Whole Foods are remarkably deep: the chain is now even cheaper than price breaker Walmart for a whole range of products. American food retailers were already in a price war sparked by Lidl’s arrival and how competitors Aldi, Kroger, Ahold Delhaize and Walmart reacted to it. The Amazon – Whole Foods combination has now fueled the flame of that war even more.

 

Several analysts had expected things would not turn out like this: Whole Foods is (or better: was) a very expensive luxury retailer for a fairly elite audience of bio fans and foodies. With only 460 stores, the chain is a relatively small player (Ahold Delhaize has 2,000), but price cuts always create a domino effect: every competitor has to follow suit and that will cost them a lot. Investors will then lose faith in the traditional supermarket chains and will dump their shares. Those chains will once again lose billions, including Ahold Delhaize. This all happens in an industry with razor-thin margins. Amazon has one advantage over the others: money is not an issue…

 

Next steps

Low prices are nothing more than an entry into the FMCG market for Amazon, whoses real impact will probably be well beyond a pure price war: the eCommerce player will integrate the supermarkets in its business model and reshape its store formula. The first signs are there already: Whole Foods has started selling Amazon Echo and Dot devices, it has introduced Prime as its customers' loyalty program and Amazon Lockers and in return Amazon.Com, AmazonFresh, Prime Pantry and Prime Now also sell Whole Foods’ private labels…

 

Analysts feel the next steps are predictable: a new board will inevitably analyze Whole Foods’ structure, shuffle its product ranges and remodel stores. Entire sections (like sustainable fashion) will be cut and new services (meal boxes, click & collect) will be added. Manned Amazon booths will be added to the stores to help sell Amazon Prime subscriptions and to help install Amazon accounts, apps and gadgets. The cheaper 365 store formula may be cut entirely since it would become superfluous.

 

New formula

Amazon still is primarily a technology company: based on thorough analysis of the data (of Whole Foods’ entire customer base) and its Amazon Fresh experience, the retailer should have created a very clear image of how consumers acquire food. It has all it needs to trial a new store formula at Whole Foods, one that better taps into the shopping behavior of millennials and the generation Z.

 

The expectations are sky high: contemporary supermarkets are still quite a lot like the supermarkets that opened their doors in the 1950s and 1960s, with the exception of size and self-scanning opportunities. The business model is still entirely the same, including routing, marketing mechanics and the weekly folder. Where is the innovation?

 

Wake-up call

Admittedly, most experts are not that impressed yet by Amazon’s efforts in its physical store network. Yes, its book stores are doing some interesting things when it comes to merchandising, product range, price communication and omnichannel integration, but it is not a revolution. The Amazon GO convenience stores are also a grand idea, but the actual implementation is still not ready for action. The Amazon Fresh PickUp locations on the other hand are just an upgraded version of the French Drives.

 

Nevertheless, the company’s speed and the amount of resources it commits are a significant wake-up call for traditional supermarket companies. Retailers have to have competitive pricing and have to distinguish themselves: there is no more room half-hearted compromises. What will Walmart and Google do? How will Ahold Delhaize use its online supermarket Peapod? Will Aldi and Lidl be forced to boost their online activities? Will the trickle in the United Kingdom blow over to Europe? The stakes are high… place your bets

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