Amazon.com (NASDAQ: AMZN) caused a huge temblor when it acquired Whole Foods Market, shaking Kroger's (NYSE: KR) stock from its moorings and demolishing the IPO of meal-kit delivery service Blue Apron (NYSE: APRN). The potential seems limitless for what can be achieved in marrying the one retailer's unique ability to deliver on price and convenience with the grocery store's reputation for quality.
While the e-commerce king's ability to shake up the industry is what is driving the fear now -- its new Amazon Go store with no checkout registers is an example -- it's clear there is still much to do with Whole Foods Market before Amazon can be seen as truly disrupting the industry. So far, the reality is not matching up with the promise.
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New research from data analytics firm Dunnhumby suggests that though rivals are worrying about how best to respond to Amazon's threat, consumers haven't changed their perception at all.
An expensive proposition
One of the biggest criticisms against Whole Foods has always been its high prices, which led to the derisive moniker Whole Paycheck. During its growth phase, the organic grocer really didn't have to address the issue, as well-heeled shoppers willingly paid up for the privilege of its higher-quality produce.
But things changed when Kroger and Wal-Mart Stores (NYSE: WMT) began adding organic goods to their shelves and were able to effectively compete against Whole Foods. In response, the retailer introduced its own discount brand, 365 by Whole Foods, and opened up a number of discount stores under that banner.
When Amazon bought the grocer, the very first thing it did was slash prices on Whole Foods' private-label foods on its website. It caused a stampede into its virtual aisles as consumers snatched up almost all of the 2,000 365 products on sale. One Click Retail said the frenzy caused Amazon to sell out of almost everything, with only 7% of the top 100 items left in stock.
Subsequent reviews suggest the price cuts were only temporary, perhaps a way for Amazon to make a big splash. Research firm Gordon Haskett surveyed 110 products over a five-week period and found that although prices were lower, they weren't as drastically reduced as some of the headlines had made it seem -- only about 1.2% on average.
It does seem to have worked, whatever its purpose. The Wall Street Journal recently reported 365 by Whole Foods boosted sales at AmazonFresh, the e-commerce leader's online grocery delivery service. Over the last four months of 2017, sales jumped 35% to $135 million.
Not moving the needle
But all that might mean is that some of the customers that shopped at the grocer before but left have now returned. The Dunnhumby report indicates most people still think Whole Foods is a high-quality, but high-priced store. And with price remaining the primary factor in where consumers decide to shop (quality is second), Amazon still has work to do to convince people things are different.
In a survey of 11,000 consumers, the market researchers sought to find out not only what consumers felt about a particular grocer, but also how their preferences help drive a company's financial performance. Merging the factors together gave Dunnhumby its Retailer Preference Index.
At the top of the list was Trader Joe's, which was found to have the perfect combination of price and quality, followed by Costco, Amazon itself, and H-E-B. Walmart came in fifth and Whole Foods just barely made it into the top 10 because of its enduring legacy of being a high-quality grocer. In fact, no one ranked higher than the organic grocer on its quality produce.
By the same token, Whole Foods was the lowest-ranked supermarket when it came to price. Of the 59 grocery retailers consumers were asked about, Whole Foods came in dead last.
Ghost of the past
So despite the ripples Amazon made after buying the chain, and even though shoppers are helping its grocery delivery service boost sales, most consumers haven't been woken up to the reality it isn't the Whole Paycheck store of the past.
Of course, Whole Foods Market is never going to be Walmart, but it can and needs to be more competitive. That means that although Amazon.com has a lot of work to do yet in convincing people they should shop the supermarket, it presents an opportunity for it to capitalize on.
Should Amazon succeed in making that connection between shoppers and Whole Foods, it may indeed create an earth-shattering upheaval in the grocery business.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.
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