Amazon Deal Could Help Soften Whole Foods’ Pricey ImageJune 20, 2017
By Nikhil Hutheesing, Consumer Reports
Amazon’s deal to buy Whole Foods could mean lower prices and greater access to premium organic food and other high-end groceries.
But it could take a while.
“There is so much fat in the way Whole Foods runs its business that Amazon will need a few years before it can drop most of its prices,” says Burt Flickinger III, managing director at Strategic Resource Group, a consumer industry consulting firm based in New York City.
The grocery industry is still in a state of shock since Amazon announced an agreement on Friday to buy the Whole Foods chain for $13.7 billion. The deal would close later this year, but others could put in bids for the company.
Industry experts believe Amazon and Whole Foods could help each other immensely. Whole Foods offers more than 460 physical store locations where customers could pick up online orders placed through AmazonFresh, Amazon’s grocery delivery service.
Amazon has been experimenting with cashless technology that might help shoppers avoid standing in checkout lines.
By joining the Amazon family, Whole Foods would have greater buying clout in the products that both companies sell, Flickinger says.
AmazonFresh and Whole Foods sell organic products and prepared foods, but the greatest overlap is in dry goods, such as cookies, crackers, and other snacks, according to Darren Seifer, the food and beverage analyst at market research firm NPD Group.
Unlike other big supermarket chains, such as Kroger and Walmart, Whole Foods, created in 1980, expanded through the 1990s by acquiring eight existing chains including Fresh Fields, Bread & Circus, and Wellspring Grocery. As a result the chain doesn’t have a centralized warehousing and distribution system for food manufacturers to more cheaply deliver products, Flickinger says. Whole Foods’ prices reflect those higher delivery costs, he says.
Amazon, for its part, has major investments in refrigerated food distribution centers since it launched its AmazonFresh business in 2007. These distribution centers just might be able to help Whole Foods lower its distribution costs and, in turn, its prices.
Whole Foods may also be able to find ways to pay its suppliers less and pass the savings on to shoppers. Over the years, the store has been known for not squeezing its suppliers on cost but paying them well in an effort to build a Whole Foods community, Flickinger says. It’s possible that under Amazon, that relationship will go away.
If Amazon is able to cut prices at Whole Foods, it might win new cost-conscious consumers who have avoided the grocery chain that some dismissively dubbed “Whole Paycheck.”
For Whole Foods, lower prices couldn’t come at a better time.
In CR’s 2016 supermarket survey of 58,000 readers, 45 percent of shoppers said low prices were their top reason for choosing a particular store. Variety of goods (30 percent) and quality of produce (23 percent) also drive customers, the survey found. Meanwhile, our survey respondents’ biggest complaint about Whole Foods was price. The store’s prices for organic options also were a negative.
Amazon might not have a lot of time to get its prices right.
No-frills grocers that tempt with rock-bottom prices, such as the German chains Aldi and Lidl, are already making inroads in the U.S. Aldi has more than 900 stores, and Lidl, which opened its first seven stores in North Carolina last week, has announced plans to open an additional 1,500 by 2023.
Though that puts more pressure on Amazon, all the activity on the supermarket front is good news for consumers. According to Flickinger, a family of five that switches from a traditional U.S. supermarket, such as Winn-Dixie, to Lidl could save up to $5,500 per year on grocery bills.
Greater use of technology could also help to lower costs at Whole Foods. Those savings could potentially lead to lower food prices. Customer-service technology is a unique arrow in Amazon’s price-cutting quiver, says Greg McBride, chief financial analyst at Bankrate.
Amazon hasn’t divulged how it would use new technology in its walk-in grocery stores, but it’s not difficult to imagine a future with no cashiers or checkout lines, says Seifer, the analyst from the NPD Group. Fewer employees on the payroll presumably means better prices for customers.
Amazon already has such a store in the prototype phase in Seattle. Instead of paying at a cashier or going through a self-checkout line, customers never engage with an employee—they simply grab what they want, put it in the cart, and leave. Thanks to a smartphone app—and sensors placed throughout the store—what they take gets noticed and automatically totaled up.
Payment is made automatically when the app is linked to the customer’s mobile-payment service. Amazon said last week that it has no plans to use this technology at Whole Foods.