US: Amazon Fires a Shot Across Grocers’ Bow

Well, that was quick. After Amazon’s Whole Foods acquisition, we wondered if successfully leveraging the partnership would require Amazon to change more than Whole Foods. In the short term, it appears that Amazon has changed Whole Foods – and fired a shot across the bow of rival grocers who are realizing that business as usual is about to change. In our round-up of reactions to Amazon’s opening gambit in the grocery sector, we look at what Amazon’s move mean for grocery shoppers, Whole Foods, and the grocery sector at large.

By Rick Ferguson

At first glance, the changes Amazon has implemented to Whole Foods beginning August 28 are not unexpected, even as analysts have been surprised by the speed with which the moves happened. Whole Foods has lowered prices on several items in a PR move so effective that it sent shares of rival grocers tumbling; the grocer began selling the Amazon Echo smart speaker at a discount; Amazon will place delivery lockers for Prime members in Whole Foods store locations; it will begin offering a range of Whole Food-branded products for sale on Amazon.com; and it will swiftly end Whole Foods’ own loyalty program to establish Prime as the grocer’s loyalty offering.

Most analysts agree that the price cuts themselves, while certainly resulting in an avalanche of earned-media coverage the likes of which most companies can only dream, won’t do much to move the needle. Whole Foods had a well-deserved reputation for premium prices that resulted in the ironic “Whole Wallet” commentary; even with current and future price cuts, the grocer’s prices will remain for the most part well above its rivals and targeted squarely at its core quality-over-price-oriented affluent demographic. Still, the Wall Street Journal found anecdotal evidence that the initial round of price cuts has made an impression:

“Dina Cruz stopped at a Whole Foods in Central Los Angeles on her way to work Monday morning to check for lower prices. The 33-year-old teacher shops at Whole Foods about once a week for baby food but tends to buy the rest of her groceries at Trader Joe’s. On Monday Ms. Cruz noticed cheaper prices on baby food as well as fruits, vegetables and some meats. If the prices stay consistently lower, she said, ‘I’ll definitely shop more here.’”

As the Journal also notes, however, Amazon can afford to place continued price pressure on its rivals due to its established – and investor-supported – strategy of sacrificing short-term profits to gain market share:

“By cutting prices on high-volume staples like bananas, eggs and ground beef in 470 Whole Foods stores, Amazon is signaling it will compete for that traffic. Even if it loses money, it hopes it can bring shoppers into stores, win their loyalty to the whole company and prompt them to spend more money, say former Amazon executives. ‘Amazon’s using the same playbook they always have when competing with booksellers and other retailers,’ says Chris McCabe, a former Amazon performance evaluation and policy enforcement investigator who now works with sellers on the retailer’s marketplace. ‘They take out their revenue stream by killing them slowly on price.’”

Again, the PR value of this move cannot be overstated. The acquisition has already spooked the Street enough that food retail stocks are down 20 percent since Amazon announced the deal, while consumer packaged goods (CPG) stocks have fallen 7 percent. Investors have been particularly hard on Kroger Co., the nation’s largest grocer – disappointing earnings thus far in 2017 have seen its stock has fallen 36 percent, leading to a $7 billion decline in valuation. Given Whole Foods’ niche appeal – after all, investors didn’t punish Kroger so harshly for Whole Foods’ moves prior to the acquisition – we may surmise that it’s more the perception of Amazon’s entry into the grocery sector, rather than its actual short-term impact, that has spooked its rivals’ investors.

Still, a closer look at Amazon’s long game reveals that a primary long-term benefit to the acquisition is Amazon’s goal of extending relationships with its core Prime members beyond its ecommerce business and into the physical world. For example, consider what the acquisition does for Amazon’s distribution capabilities. Money quote from Tom Gehani at L2:

“On Monday, when the deal closes, Amazon will have instantly gained distribution to 239 new cities. Consumers will be able to use those locations not only to buy fresh food, but also to get non-perishable products from Amazon via locker pick-up points. Investments like the Amazon Hub program, which places Amazon lockers inside apartment buildings, and the expansion of Instant Pickup to college campuses make clear that Amazon is focusing on making consumers feel comfortable ordering products online without fear of ‘porch theft.’ The use of lockers in stores proves that Amazon intends to use Whole Foods locations as more than just grocery shopping destinations. Consumers can pick up household supplies, electronics, and maybe someday prescription medication from these lockers, putting Amazon in much closer competition with mass merchants like Walmart and convenience stores such as Walgreens.”

And then there’s the penetration of Prime – arguably the world’s most successful loyalty program – into the physical world. Money quote from Neil Saunders at Chain Store Age:

“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.”

And that, dear readers, is why Kroger, Walmart, and Target should be worried – and perhaps why Walgreens and CVS should be worried too. What Amazon is doing now with its opening salvo of Whole Foods moves is what they’ve always done, since Jeff Bezos began selling books out of his garage: Focus relentlessly on growing the value of their customer relationships. The reason why Kroger is getting hammered so hard is that, for all its vaunted sophistication in leveraging data analytics to personalize offers to its customers, it has never extended its loyalty value proposition beyond the transactional. It has never differentiated the in-store experience for best customers, and never attempted to add any relationship-building benefits into its loyalty program beyond price-focused promotions. Now Kroger is vulnerable not only to Whole Foods, but also to every deep-discount rival that manages to sell a dozen eggs for $0.25 less than Kroger can.

It’s true, then: with its early moves, Amazon has changed the grocery game. Grocers now have two paths forward: they can continue to focus solely on price, and continue to hammer their margins with price cuts until there’s nothing left; or they can focus on omni-channel efforts to build strong, differentiated relationships with best customers by focusing relentlessly, as Amazon does, on the loyalty experience. There is no better path to success.

Rick Ferguson is Editor in Chief of the Wise Marketer Group.

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