Much has been written in the past few weeks about the impact Amazon would have on the grocery industry after acquiring Whole Foods. The Washington Post called it “a clear signal of sweeping changes to come”, and the New York Times cited “the Amazon Effect” after comparing before and after prices on a basket of goods. The stock prices of Kroger and Walmart have dropped in anticipation of the revenue they will lose to Amazon. While I don’t know what Amazon will do, and I believe they will pick up some market share, I don’t think their pricing strategy will result in a price war.
Let’s start with the fact that Whole Foods prices were already high. They did not earn the nickname “Whole Paycheck” because of low prices. They offered more organic foods, and they had a reputation for high-quality produce, meat and other fresh items. Customers also preferred the layout and shopping experience at Whole Foods over their larger competitors. For those reasons, Whole Foods could charge premium prices. On the other hand, there was a huge segment of customers who would not shop there because it was just too expensive; and many customers who did shop there, would not purchase staples like milk, eggs, bread, butter, condiments, etc. By lowering some prices, Amazon will certainly make Whole Foods a bit more attractive for some items and some customers.
Amazon’s reputation with most customers is that prices are good, you can get practically anything you want, and with Prime you get free shipping. Amazon earned that reputation by offering low prices when they first started, but they also made shopping very convenient. They could offer the low prices by having an efficient supply chain, but without all the physical stores or as many employees as competitors. One-click ordering and two-day shipping made things easy. With that business model, Amazon grew very quickly, but also made very little money.
When I talk to Amazon customers now, the convenience is the deciding factor. They certainly like the fact that they don’t have to pay for shipping, but equally important in their purchase decision is convenience. They like the ease of looking online, ordering with one click, and receiving their product two days later. They will even pay a little more for that convenience. And Amazon makes a little more money now, although their margins are still incredibly low.
Amazon understands why their customers buy from them (convenience). They have also turned Prime into an amazing loyalty program, but they frequently do not offer the lowest price anymore. Their prices are comparable to competitors, but the convenience is superior. So, they no longer feel the need to be the low-price provider.
When I think about Amazon’s entry into groceries and try to guess what they will do, I let their past guide me. The margins in the grocery industry are already lower than any of the industries Amazon previously entered. Amazon executives know their prices just need to be competitive, and based on convenience, the Prime loyalty program, and the company’s brand reputation, customers will shop there. They also know customers will pay more for fresher foods and a better shopping experience, so there will be no need to try to undercut the likes of Kroger and Walmart.
Another significant point is grocery shopping is very local. Customers will not go too far out of their way to shop, unless there is something very specific they cannot get locally. That is not true when customers can order online and receive their food very quickly (convenience). So, lowering prices at Whole Foods is unlikely to cause potential customers to drive an extra 30 minutes, but making it easier and more convenient to shop for groceries could shift the game.When I add it all up, I don’t see a price war. My bet is Amazon’s price changes will get some splashy headlines, but will not undercut the grocery chains, and Amazon will focus on winning with convenience and customer loyalty. They are great at both of those things, and they will pick up significant market share without trashing their margins.