Amazon makes a move at Whole Foods

Commentary: Change is coming faster than expected to the grocery chain with a price-perception problem.

(Amazon's $13.7 billion purchase of Whole Foods Market will be finalized on Aug. 28. And that same day, Whole Foods will offer lower prices on some of its top-selling items. Amazon also plans to place lockers in Whole Food stores, and make Amazon Prime the grocer's customer rewards program.)

The takeover by Amazon always meant change was inevitable at Whole Foods. However, that change — much like the deal that facilitates it — is coming much faster than anyone imagined.

The announcement that Amazon will reduce prices on grocery staples at Whole Foods signals a clear intention to remedy what has been one of the grocery chain's biggest weaknesses. It will, at a stroke, help improve basket sizes, transaction values, and customer loyalty.

For the wider grocery market, this is not an immediate threat. Whole Foods remains niche, and its general proposition will continue to be more elevated than most grocers. However, rivals should be under no illusion that they are now dealing with a competitor that is not afraid to damage profits and margins if it creates long term gains. This will only add further pressure to already crimped margins in the sector.

The linking of Prime to Whole Foods is another smart move. Not only will this allow Amazon to target discounts and offers effectively, it will also give it significant intelligence on the preferences and habits of Whole Foods shoppers. Given that 70.3% of Whole Foods core customers are already members of Amazon Prime, the linkage covers a significant part of the existing shopper base.

Finally, the selling of Whole Foods branded products through Amazon's other channels is no surprise. Given the high regard in which the brands are held, this will provide a measurable improvement to Amazon's own food proposition. Moreover, it will facilitate greater volumes which will generate economies of scale and cost savings down the line.

Amazon is wasting no time in making the most of its newest division. Worryingly for others in the market, these things are only the opening salvo in what will be a time of rapid change.

Neil Saunders is the managing director at GlobalData Retail.

Login or Register to post a comment.