Well, that was fast. Amazon announced on Thursday that, come Monday when its $13.7 billion acquisition of Whole Foods is complete, they will begin slashing prices on common favorites such as organic apples, almond butter, rotisserie chickens, and a Whole host of other Foods.
While the speed is outright stunning, the move itself is not unexpected because, frankly, something had to give. Amazon famously operates on a razor-thin, 2% profit margin, and its founder Jeff Bezos once famously quipped, "Your margin is my opportunity." Whole Foods, with its whole paycheck reputation as a vendor of premium goods at a premium price, operated at 5%.
Closing this gap appears to be priority one as Amazon turns the unprofitable, zero-emissions tanker around. Wilke promised, "This is just the beginning — we will make Amazon Prime the customer rewards program at Whole Foods Market and continuously lower prices as we invent together. There is significant work and opportunity ahead, and we’re thrilled to get started.”
That work no doubt will be aimed at reclaiming its place as the beginning and end of every conversation regarding organic grocery, reasserting its dominance over competitors in a market that has proven difficult to remain atop. This includes larger stores like Kroger who effectively cut into Whole Foods market share with their own organic, private label offerings (their stock was down 8% at the time of publication); the other big bully, Walmart, also expanding its organic offerings (down 3%); privately held chains like Trader Joes; and regional and independent stores riding the tide of health-conscious consumers.
The Amazon Flows in All Directions
This isn't just about in-store shopping of course, the move also has omnichannel and online implications. First, Whole Foods grocery stores will now double as Amazon delivery points, with lockers for customers to pick up ordered merchandise and drop off returns. This will cut delivery costs (the most expensive part of delivery is always the last mile), offering customers faster turnaround and even potentially discounts on items when they choose in-store pickup. Amazon will be testing different pricing and turnaround time combinations with the 400 local footholds they now have in America's most affluent neighborhoods.
Second, Prime will become the Whole Foods membership loyalty and rewards program. Prime Shoppers will be automatically enrolled and will see discounts on popular items beyond the recently-announced price cuts. This will add to the reams of data Amazon already has on its customers' shopping habits, add to the treasure trove of existing Prime benefits, and encourage existing Whole Foods customers not already enrolled in Prime to do so.
Finally, Amazon will be selling Whole Foods private label goods--initially including Whole Foods brand, 365, Whole Catch, and Whole Paw--on their Prime platforms: Prime Now, Prime Pantry, and Prime Fresh. Essentially, allowing Prime customers to get high-quality goods via existing delivery platforms, Amazon is not just focused on making Whole Foods customers into Prime members, but vice-versa.
365 is a Prime Number?
Indeed, encouraging cross pollination among Prime members and Whole Foods customers is paramount for Amazon, who wants to see both groups expand and overlap.
Expanding Prime membership, particularly among the middle and working class, is among Amazon's chief goals, and for good reason--Prime members spend more on Amazon platforms, are the earliest adopters of new Amazon services, and are good for an annual $100 in the bank.
And in the upper economic echelons, it is reaching its saturation point: A recent survey by Piper Jaffray found that 82% of households making $112,000 or more a year are already Prime members. Contrast that with 67% of households with incomes between $68,000 and $112,000 and less than 50% of those earning less than $68,000, and you can see why encouraging middle- and working-income consumers to enroll in Prime to save on quality groceries makes sense.
By the same token, the move once again allows Amazon to expand the goods and services Prime members rely upon, increasing the portion of their monthly paycheck they surrender directly to the retail giant. As we previously discussed, Amazon's acquisition of Whole Foods has everything to do with encouraging its most valuable Prime members to dive headfirst into their grocery product, inching ever closer to total domination.
With Prime members already turning to Amazon for everyday retail, food and grocery delivery, photo prints, household services, music, video, and who-the-heck-knows-what-else, we are reaching the point where one could be forgiven for wondering aloud, what percent of Prime household expenditures will Amazon ultimately claim? What good or service could a Prime member require today that Amazon could not fulfill? Will the answer still be the same tomorrow? And what technological breakthrough can be uncovered to combat them?
The Freshest Corn in the Market
Or maybe, in the face of a technological arms race, it's just some good ol' fashioned hustle that will win the day. Stew Leonard owns a chain of six produce-centric grocery stores on the East Coast and says that worrying about the next big thing is all part of the business: “I’ve been in retail since I was a kid, and I’m always nervous. Costcos were opening, then Walmarts, then Whole Foods. But at the end of the day, you just have to try and get the freshest corn out there on the sidewalk.”
The fear among grocers is that Amazon now has access to some of the freshest corn in the market...and soon customers won't have to walk all the way to the sidewalk to get it.
