Amazon to slash prices on upscale US grocer's products

A Whole Foods Market in New York. Amazon said it will be reducing prices at the grocer's after taking over next Monday.
A Whole Foods Market in New York. Amazon said it will be reducing prices at the grocer's after taking over next Monday.PHOTO: REUTERS

It will sell Whole Foods' store brands online after it takes control of the firm

NEW YORK • A price war has raged in United States supermarket aisles for well over a year, bloodying retailers big and small.

Come next Monday, Amazon plans to toss a smart bomb into the fray.

The online giant's move to slash prices on everything from organic baby kale to fair-trade bananas on the same day its US$13.7 billion (S$18.62 billion) acquisition of Whole Foods Market closes showed the "high-velocity decision-making" Amazon founder Jeff Bezos claims as his hallmark, and sent shares of Kroger, Costco and Walmart stores reeling on Thursday.

Amazon will also begin selling Whole Foods' store brands on its site, install Amazon pickup lockers in some locations and meld its Prime programme into the upscale grocer's operations.

While this will not exactly bring responsibly farmed salmon to the masses - after all, Whole Foods stores will remain in high-rent neighbourhoods - the price reductions could draw in curious new shoppers and present brick-and- mortar retailers with a dilemma.

Do they follow suit and see their margins squeezed, or hold fast and risk sacrificing sales in one of the few areas of the food industry that is actually growing?

"Changing prices across the board is not a simple process for most retailers," said Mr Greg Portell, a partner at consulting firm A.T. Kearney. "It takes time and labour. What Amazon has done is bring a level of dynamic pricing that will have to be matched by anybody selling food. It will disrupt the way the sector works."

Amazon is less constrained by profit expectations, thanks to a tech-industry ethos that values growth above everything. So it can tinker with the prices of organic eggs, almond butter and rotisserie chicken, experimenting with what gets customers to respond and then doubling down on those successful bets.

Amazon is less constrained by profit expectations, thanks to a tech-industry ethos that values growth above everything. So it can tinker with the prices of organic eggs, almond butter and rotisserie chicken, experimenting with what gets customers to respond and then doubling down on those successful bets.

Up until a couple of years ago, the grocery price war had largely been fought over products like soda, soup and cereal, leaving higher-end organics to compete on quality.

Organic products still have fatter margins, giving Amazon more room to experiment on pricing.

For years, organic food was a niche category, but Whole Foods showed there was growing demand as it opened more than 400 stores across the country.

Eventually, major chains like Wal-Mart and Kroger responded by stocking more organic items.

US consumers bought more organic fare than ever before last year, with sales increasing 8.4 per cent to US$47 billion and accounting for more than 5 per cent of all food sales in the country, according to the Organic Trade Association.

But as organics became more widespread, the traditional supermarkets undercut Whole Foods on price, and the chain's same-store sales have fallen for eight straight quarters as it struggled to respond.

It introduced a new store format called 365, offering less expensive items to attract younger, budget-conscious shoppers. But the declines continued, and the firm had only opened 365 locations before Amazon pounced in mid-June.

Whole Foods is still a small player in the US grocery market compared with Wal-Mart and Kroger, who together garner more than 30 per cent of sales.

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A version of this article appeared in the print edition of The Straits Times on August 26, 2017, with the headline 'Amazon to slash prices on upscale US grocer's products'. Print Edition | Subscribe