Why Amazon's First Act At Whole Foods Was To Slash Prices

It was a message about the power of resources, the ability to bear - and inflict - financial pain and the strategic advantages that global technological scale provides.

Because of their capacity to surprise, to embrace risk - and to win - Elon Musk, Jack Ma and Jeff Bezos have become the executives to watch, not just in tech, but in any industry. JL

Nick Wingfield and David Gelles report in the New York Times:

The significance goes well beyond the price of organic avocados, baby kale and rotisserie chickens. It is a way for Jeff Bezos to announce his plan to take on competitors like Walmart and Kroger. Amazon plans to weave together its online business and physical stores by turning its Prime membership program into a Whole Foods rewards program.Whole Foods’ private-label products will be available through Amazon’s online services and Amazon lockers will be installed in Whole Foods markets.

The era of Whole Paycheck, the derisive nickname for Whole Foods, may be drawing to a close. Amazon, which takes control of the upscale grocer on Monday, intends to slash prices the same day.

The significance of the move goes well beyond the price of organic avocados, baby kale and rotisserie chickens, all of which will cost less on Monday than on Sunday. Rather, it is an outsize way for Jeff Bezos, Amazon’s chief executive, to announce his plan to shake up the grocery industry and take on competitors like Walmart and Kroger.

“This is how Amazon operates,” said Michelle Grant, head of retailing at Euromonitor, a market research firm. “It’s all about speed, speed, speed.”

Mr. Bezos has always been willing to lose money, disappoint shareholders and start discount wars in his efforts to challenge and inflict pain on competitors. In the 23 years that Amazon has been in business, he has done it again and again — with books, diapers and now groceries — fundamentally changing entire retail categories.

“I absolutely think it’s putting the rest of the market on notice,” Bob Hetu, an analyst at Gartner, the technology research firm, said of Amazon’s announcement on pricing.Investors drove Kroger shares down more than 8 percent on Thursday; shares of Walmart, the nation’s biggest grocer, fell about 2 percent. Both companies’ shares also fell sharply when the deal was announced in June.

Amazon plans to weave together its online business and physical stores by turning its Prime membership program into a Whole Foods rewards program, providing additional savings to customers. Amazon Prime is a $99-a-year service that gives customers faster free shipping, video streaming and other benefits.

Whole Foods’ private-label products will be available through Amazon’s online services and Amazon lockers that will be installed in some Whole Foods markets. Customers will also be able to return online orders to Amazon through the lockers.

“We’re determined to make healthy and organic food affordable for everyone,” Jeff Wilke, the executive who runs Amazon’s consumer businesses, said on Thursday in an announcement about the changes. “Everybody should be able to eat Whole Foods Market quality.”

Discounts are not the only reason shoppers use Amazon — selection and convenience are others — but Mr. Bezos has never been shy about starting price wars that inflict pain on rivals. In the 1990s, the company tussled with Barnes & Noble to see which could discount books the most. Amazon and Walmart have been in an on-and-off price war in a variety of categories for years.

In its battle with Quidsi, a start-up that owned Diapers.com, Amazon put so much pressure on the company that it eventually agreed to be acquired by Amazon rather than by Walmart.

Ever since Amazon made the surprise announcement in June that it was acquiring Whole Foods for more than $13 billion, competitors have expected it to shake things up at the grocer, which has struggled in the face of competition from Costco, Walmart and others that have wooed customers with a growing selection of organic produce and kitchen staples. (Gabrielle Sulzberger, a private equity executive who is married to Arthur O. Sulzberger Jr., the chairman and publisher of The New York Times, is the chairwoman of Whole Foods.)

Still, the speed with which Amazon completed the acquisition and embarked on a price-cutting campaign is stunning. Amazon completed the purchase in under three months — unusual for a multibillion-dollar transaction. The Federal Trade Commission approved the deal on Wednesday.

Amazon did not say how much it would cut prices in Whole Foods stores, 460 of which are spread across the United States, Canada and Britain. It promised that there would be further cuts in the future. People who have studied Whole Foods’ struggles in the marketplace said the reductions would have to be substantial to compete with other stores.

“I believe what we will see is Amazon and Whole Foods becoming aggressive on price,” said Brittain Ladd, a strategy consultant who previously worked for Amazon on its grocery business. “I won’t be surprised if some prices are lowered 15 percent to as high as 25 percent in some categories.”

Mr. Wilke of Amazon said in his statement that lowering prices would not compromise the quality of products at Whole Foods, the brand’s main selling point. The items the company said it would drop prices on include bananas, butter, crunchy almond butter, organic large brown eggs, responsibly farmed salmon and tilapia and organic Fuji apples.

A number of groups, including members of Congress and representatives of organized labor, have raised concerns about how the acquisition may affect competition in the grocery business, but the Federal Trade Commission had no trouble with it.

Antitrust lawyers noted that Amazon and Whole Foods were relatively small players in the grocery business and in different corners of the market — Amazon in online grocery delivery and Whole Foods in physical retailing.

Those arguments will probably not assuage a growing chorus of Amazon critics who believe it is developing too powerful a grip on retail spending, at least on the internet. Yet Amazon’s announcement of immediate price reductions on groceries underscores how the company has managed, so far, to say on the right side of regulators.

“At the end of the day, the F.T.C. is in the business of watching out for the consumer,” said Brendan Witcher, a retail analyst at Forrester Research.

It remains to be seen whether the deal will revive Whole Foods’ fortunes or become a costly move into an industry that Amazon has so far failed to master. Amazon has offered its own internet grocery business, AmazonFresh, for a decade, but has had little impact on the habits of consumers, who overwhelmingly prefer buying their groceries in stores.

Amazon is experimenting with automation technologies that could save costs in physical stores by eliminating cashiers, but it has vowed not to use those technologies at Whole Foods to lay off workers. But sharp price cuts on items in stores will put pressure on Amazon to find cost savings elsewhere at Whole Foods, analysts said — for example, by making the logistics network that delivers goods to stores more efficient.

After the companies combine, Amazon’s competitors in the grocery business will still be vastly larger. Walmart has more than 4,600 stores and last year started making a multibillion-dollar investment in lowering grocery prices. Walmart has also significantly increased its investment in online shopping through acquisitions to better compete with Amazon on its main turf.

And this week, Google announced an agreement with Walmart that would allow people buy Walmart items through Google Express, an online shopping mall that has sought, without much success, to compete against Amazon.

“We feel great about our position with our network of stores around the country and fast growing e-commerce and online grocery businesses,” said Randy Hargrove, a spokesman for Walmart.

Local grocers expressed some trepidation about Amazon’s aggressive entry into their business, but said it was part of a long history of upheavals and competition.

Stew Leonard Jr. is the chief executive of Stew Leonard’s, a chain of six grocery stores in New York and Connecticut that focuses on fresh produce. There are several Whole Foods close to his stores, and Mr. Leonard said he had been watching the Amazon deal closely.

“I’ve been in retail since I was a kid, and I’m always nervous,” he said. “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.”