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Will Whole Foods continue to be Whole Paycheck?

Just after Amazon closed on its Whole Foods purchase in August, a Bloomberg headline read, “Amazon cuts Whole Foods prices as much as 43% on first day.”

I saw this headline shared widely among my colleagues, and I felt it was misleading.  

Screen capture of Bloomberg article announcing Amazon's price cuts at Whole Foods
Screen capture of Bloomberg article: https://www.bloomberg.com/news/articles/2017-08-28/amazon-cuts-prices-at-whole-foods-as-much-as-50-on-first-day

It implies huge price cuts across the store (which there weren’t) and across the chain (which weren’t verified). Rotisserie chickens at my local Boston-area Whole Foods are sometimes priced at $4.99, compared to this sale price of $9.99. It also ignores the probability that more pervasive, more realistic price cuts aren’t too far from becoming reality.

Whole Foods Price Cuts

When supermarket ownership changes hands, cutting prices on highly visible items in highly visible locations is a common tactic. The Bloomberg article reports on a single store: the Whole Foods in Manhattan’s Columbus Circle, where my brother has seen Larry King shopping. That store is hardly representative of the entire chain or of America as a whole. But the price cuts bolster the idea that Amazon is helping Whole Foods become more affordable. (The article notes similar price cuts in two other stores in major cities. However, it might not reflect what’s happening in their Boise, Westport, or Milwaukee stores.)

For example, when Albertsons, the parent company of my local Shaw’s and Star Market stores, spun off from SuperValu in 2013, they slashed prices. They also removed the requirement for loyalty cards to get sale prices and cut prices on items that help set the price image for a supermarket. Exactly like what Whole Foods did with bananas, avocados, apples, and eggs.  

Under New Management

Clive Humby—the “humby” in Dunnhumby—and Terry Hunt wrote about this practice at Tesco in Scoring Points. They pointed to the common approach of slashing prices on bananas (which Whole Foods did, by the way, on conventional and organic bananas). Bananas are highly visible, and they’re one of the most commonly purchased products in a store.  

The traditional management view is that a retailer can offer loss leaders, selling some items below cost to encourage increased shopping traffic. This practice would then make up profit on the overall basket of items purchased.

But Humby and Hunt criticized this approach as a long-term practice because there are more effective ways to appeal to price-sensitive shoppers. One way is to identify the items those shoppers are more likely to purchase.  

Besides, supermarkets don’t always stick with price cuts after making an initial post-acquisition splash.

These initial cuts are just a way to essentially announce that the store is “Under New Management!”  

Whole Foods: Under New Management!
Original image: https://commons.wikimedia.org/wiki/File:BwyWalk0505_WPWholeFoodsUnionSquare.jpg

 

Whole Foods’ Supply Chain

More importantly, industry observers should be paying attention to the bigger story: Amazon is poised to introduce huge efficiencies to Whole Foods’ supply chain. This will have a much larger impact on prices.

United Natural Foods (UNFI) essentially runs most of Whole Foods’ supply chain and distribution. Of UNFI’s business, 35% comes from Whole Foods, which could disappear, although Supermarket News notes that an agreement is in place through 2025.

It should make UNFI nervous that Amazon has 290 distribution facilities in the U.S.. Twelve of these are dedicated to Whole Foods and 20 others servicing Prime Pantry and AmazonFresh, which will be very useful for a grocery operation. I don’t think it’s a big stretch to say that Amazon will work toward making their in-house facilities work for Whole Foods. However, it will take a significant amount of effort to get the perishable operations running well. As well as adapting to the realities of servicing high-volume stores compared to direct-to-consumer shipments.  

A 2015 research paper by an MIT student showed that Amazon was wasting nearly one-third of its bananas due to a process issue. I’m sure Amazon will find more learnings like this one.

Given that Amazon could absorb some of its external distribution costs from UNFI into its existing distribution infrastructure, I suspect there will be significant back-end cost savings in the next few years.  

Plus, given Amazon’s record of selling goods at low margins, I suspect those savings will be passed through to Whole Foods’ shoppers and reflected in prices on shelves.  

The big questions: When Whole Foods is no longer Whole Paycheck, how will consumers behave differently? And how will that affect manufacturers who sell to Whole Foods and Amazon?

I can help you think about pricing your products as the retail environment continues to adapt. You can contact me here.

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