Amazon.com Inc and Whole Foods Market are making a surgical strike in
the already brutal grocery price war.
On Wednesday, Whole Foods debuted a much-anticipated loyalty program
that offers special discounts to Prime customers, including 10 percent off
hundreds of sale items and rotating weekly specials such as $10 per pound off
wild-caught halibut steaks.
Those perks are available now in Florida and will roll out to all other
stores starting this summer. Amazon previously announced free two-hour delivery
from Whole Foods stores for members of Prime, its subscription club with fast
shipping and video streaming.
The new loyalty strategy will test whether Amazon’s $13.7 billion deal
for Whole Foods brings much-feared disruption and an intensified price war to
the $800 billion U.S. grocery industry dominated by Walmart Inc (WMT.N) and Kroger Co (KR.N).
Whole Foods, with 463 U.S. stores and roughly 1 percent share of the
fragmented U.S. grocery market, has gained momentum since the Amazon merger
last summer, Whole Foods co-founder and Chief Executive John Mackey told
Closely watched basket size - the number of items purchased per
transaction - has grown since the merger, said Mackey. He declined to offer
Mackey is betting on Prime to convince shoppers wary of its “Whole
Paycheck” reputation that it is an affordable option for more of their
The new perks could make Whole Foods cheaper than conventional grocers
for about 8 million of its customers who already subscribe to Amazon Prime,
according to Morgan Stanley analysts.
Prime members scan an app or input their phone numbers at checkout to
receive the discounts.
Still, Philadelphia-area Whole Foods shopper and Prime member Heather
Kincade, 46, is going to need convincing.
While Whole Foods’ prices on staples like rotisserie chicken, bananas
and avocados have come down, she still thinks some every day items are
prohibitively expensive. “If I start buying dish soap and other things there, I
will have hit the big time,” she said.
In Amazon, Whole Foods has found an owner that is famously comfortable
spending away profits on new businesses or on lower prices.
“Given how important it is for Amazon to provide value for their
customers, and customers value lower prices, I would think they’d be
comfortable operating Whole Foods at a lower margin while experimenting with
the operating model,” said Tom Furphy, former vice president of consumables and
AmazonFresh, and now chief executive of Consumer Equity Partners.
Mackey said more rounds of cuts are in the cards.
“Whole Foods is going to become more and more and more competitive,”
said Mackey, who declined to detail how much of a haircut its suppliers will
Hain Celestial Group, one of Whole Foods’ biggest suppliers, says a
lower profit margin may be worth it.
“I never mind giving up margin for growth,” Hain CEO Irwin Simon told
Small grocers, who still control a hefty portion of U.S. sales,
typically have razor-thin margins. They are under increasing pressure as German
discounters Aldi and Lidl lower prices, too.
Walmart said it will keep offering everyday low prices to all shoppers
at its more than 5,000 U.S. stores.
Kroger Co, the largest U.S. supermarket operator with roughly 2,800
stores, uses shopper data to personalize loyalty discounts.
CEO Rodney McMullen told Reuters earlier this month that the chain’s
prices will “absolutely” be lower than Whole Foods on the typical shopper’s
basket of about 50 items per week.
“It’s easy to beat somebody on four or five items,” said McMullen.
Kroger tested an annual grocery delivery subscription but tabled it due
to insufficient demand, he added.
Click here for the original article form Reuters.