Whole Foods Price Cuts Make Amazon an Unlikely Price Leader

By Laura Stevens and Heather Haddon Features Dow Jones Newswires

Amazon.com Inc. on Monday put itself in the unusual position of being a first-mover on price cuts when it slashed the sticker price on more than 100 items at Whole Foods Market Inc., many by more than 30%.

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Amazon typically relies on algorithms that scrape competitors' prices before automatically matching or narrowly undercutting them on its website. It focuses on items that are most popular on the site and that drive traffic, according to former executives in Amazon's retail divisions. That gives the retail giant a reputation for having the lowest prices, part of its strategy of driving more shopper traffic.

With Whole Foods, which it officially acquired Monday for about $13.5 billion, Amazon has broken with its reactive approach. For example, a dozen organic eggs was for sale at a Chicago store for $3.99, compared with $4.39 the day before and lower than the $4.19 that Mariano's, a division of Kroger's Co., was charging at a nearby store.

The price cuts could partly be a marketing stunt to mark Amazon's ownership of the chain. But they also shed light on how the company is adapting its strategy to seek success in the physical retail world it has long disrupted.

The cuts could improve Whole Foods' reputation for high prices and lure more shoppers into the chain's 470 stores. They also offer a first sign of Amazon's intent to apply order to Whole Foods' decentralized structure. Prices had varied across the grocer's 12 regions, but Monday's reductions brought those of the selected items in line nationally.

"This will make me come more," said Jen Harris, 33 years old, who skipped her Sunday shopping trip in favor of stopping by Monday morning, looking for cheaper prices on staples like chicken and fish. "I feel like Amazon is great for customers."

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The occupational therapist from Chicago typically shops for milk, eggs and snacks at Trader Joe's, Costco Wholesale Corp. or Albertson Cos.'s Jewel-Osco banner because they are cheaper.

Amazon's strategy of being a price follower, not a price leader, has helped make Amazon a major player in everything from books to apparel.

"They can be a cent below the other competitors, they don't need to go all the way down," said Guru Hariharan, chief executive of retail technology company Boomerang Commerce and a former Amazon manager.

Grocery shoppers typically enter a store with a set list of items but often make impulse purchases once there. Customers at Whole Foods in particular are generally more focused on quality and less price conscious, making it tougher for Amazon to predict how discounting products may affect traffic. Whole Foods, for example, began cutting prices two years ago, but the cuts didn't reinvigorate sluggish sales growth.

Whole Foods has some way to go to match other grocers. Analysts estimate that prices before the Amazon takeover were roughly 15% higher than conventional competitors for similar items.

"Amazon cutting prices at Whole Foods likely doesn't mean undercutting other grocers, but rather bringing prices more in line with average market prices," said Forrester retail analyst Brendan Witcher.

For example, Amazon cut the price of Whole Foods' private-label creamy and crunchy almond butters to $6.99 from $7.99, matching Trader Joe's.

A Whole Foods spokeswoman said that many store items couldn't be directly compared with competitors because the chain has higher quality and ethical standards. The price cuts and promotions will continue in the weeks to come as the merger progresses, she said.

"This is just the beginning," she said.

Amazon declined to comment on its pricing policies, but the company has previously said it finds the lowest prices and meets or beats them every day.

Traditional grocers are generally more low-tech in their approach to pricing, in part because it is difficult to measure prices that can vary by region and store. Supermarkets generally survey prices among competitors in regional markets and use those to inform how much they can charge for goods. They pay special attention to staples such as milk, eggs and bananas, as customers often know how much those cost across grocers.

Investor concern that Amazon's price cuts at Whole Foods will trigger a price war led to a stock selloff among traditional grocers Monday, continuing last week's slide. Sprouts Farmers Market Inc.'s stock tumbled 10%, while Natural Grocers by Vitamin Cottage Inc. was down by more than 2%. Kroger, the largest U.S. grocery chain by stores and revenue, slipped 1.4% before largely recovering, while Wal-Mart Stores Inc.'s shares slid slightly.

Shoppers entering Whole Foods on Monday were greeted by signs marking lower prices. A survey of items marked with cuts at Whole Foods stores in Brooklyn and California showed prices were down by around a fourth, according to J.P. Morgan.

At a Whole Foods in Chicago, some of the steepest cuts were in the fish and meat department, with rib-eye reduced to $13.99 a pound from $18.99 and salmon fillets dropping to $9.99 a pound from $12.99.

In a nod to mainstream shoppers, a box of General Mills-branded Cheerios was cut to $2.99 from $3.99. (The same-size box of Cheerios from AmazonFresh, the retailer's online grocery offering, costs $2.89.)

When Amazon does decide to lead on price cuts, they often affect its private-label brands on items like batteries or bras. In Whole Foods, that translated to lower prices on items like butter under the 365 Everyday Value in-house brand.

Amazon also sometimes leads on devices like its Kindle e-reader and Echo speaker device where there are few clear rivals. On Monday, the Echo was for sale in Whole Foods at a discounted rate of $99.99, compared with the usual price tag of $179.99. The company's smaller Dot version was $5 off at $44.99. They were also offered at the same prices on Amazon's site.

Ultimately, while Amazon invests for the long term and typically operates on razor-thin margins, it does aim for profitability, according to the executives.

For now, the decision to cut prices on just a few items is unlikely to massively change shopper behavior, analysts said.

"Two dozen items isn't going to necessarily compel the average Joe to go into a Whole Foods," said Christopher Mandeville, a senior analyst at Jefferies. "This may just narrow the gap."

--Annie Gasparro contributed to this article.

(END) Dow Jones Newswires

August 28, 2017 17:47 ET (21:47 GMT)