When Whole Foods Met Amazon: Do Opposite Pricing Strategies Attract?

When Whole Foods Met Amazon: Do Opposite Pricing Strategies Attract?

By: Amanda Navarro

The old adage “opposites attract” proved true with this summer’s biggest merger between Whole Foods Market, Inc., (“Whole Foods”), and Amazon.com, Inc., (“Amazon”). In June of 2017, Amazon announced its intentions to buy Whole Foods Market, Inc., the national supermarket chain based in Austin, Texas. By August, Whole Foods shareholders sealed their fate by approving the $17.3 billion-dollar merger with Amazon. So far, the deal appears to be a successful venture for both companies. The merger has not only aided a struggling Whole Foods, but also added even more strength to the dominant Amazon powerhouse. However, skeptics have been quick to question the lasting success of the merger. Considering the distinct pricing strategies of both companies, analysists are uncertain as to whether the “everybody wins” mentality will translate into a reality.

Before the landmark deal came to fruition, Whole Foods had fallen on difficult times. The grocery-giant endured its longest lasting decline in sales since it became a publicly traded company in 1992. With plummeting sales, profits and foot traffic, Whole Foods felt pressured to rethink its strategy. The company, known for its relatively high-priced items, released the shocking announcement that it considered lowering prices. For years, the company had been dedicated to charging a premium and avoided any temptation to engage in a “race to the bottom” with competitors. Whole Foods asserted that its high pricing strategy was unavoidable as it sold better quality products than its competitors. However, even with this new pricing development, the company worried about its lasting effects on profits. The few times that Whole Foods attempted to lower prices, financial analysists observed a lackluster outcome and immaterial change in company perception. Whole Foods felt the effects of its price reductions, with lowered profit margins and stagnant change in volume. Ultimately, the grocery-giant began to fear what, if any, opportunities it had left.

Hard pressed for options, Whole Foods fortunately found a savior in Amazon. With its wide reach, Amazon is determined to make Whole Foods accessible to its loyal customer base. As a result of the merger, Amazon will be able to bring groceries to doorsteps by selling exclusive Whole Foods products, including over 2,000 items from its store-brand “365” line. Amazon intends to meet consumer grocery needs through AmazonFresh and Prime Now. AmazonFresh advances the “click and collect” concept, allowing customers to buy groceries online and subsequently pick-up their purchases at store locations. The endless possibilities offered by Amazon translated into instant rewards for Whole Foods. In the days following the merger announcement, Whole Foods stock prices skyrocketed, while competitor prices plummeted in the following weeks. The grocery-giant not only enjoyed the prospects of future e-commerce sales, but also, according to Foursquare, experienced a 25% increase for in-store foot traffic around the nation.

While there appears to be only positive outcomes for the massive merger, both companies must overcome the pricing challenges that have plagued Whole Foods. Unlike the typical Whole Foods customer, Amazon’s customer base is much more value conscious. One of the keys to Amazon’s success is its ability to provide a variety of accessible, competitive prices to its customers around the world. Customers utilize the variety of Amazon sellers to compare countless prices for a single product. Conversely, Whole Foods has historically experienced higher profit margins compared to competitors due to its premium pricing scheme. Many contribute the early success of Whole Foods to the company’s targeting of consumers willing to pay more to “go green.” Although Whole Foods may become more accessible to a wider customer base, will its new customers be receptive to the Whole Foods culture? Does Whole Foods need a complete metamorphosis that cannot be fixed by a single merger? These issues remain with Whole Foods shareholders and have now been inherited by Amazon.

However, analysts contend that Amazon’s approach may be just what Whole Foods needs. Amazon, less concerned with low profit margins, strives for long term commitment from its customers. Similarly, Amazon’s investors are focused on gaining more customers rather than worrying about initial debt from deep price cuts. Desmond O’Rourke, a retired agricultural economist, confirmed these sentiments by explaining that “the big problem for competitors is Amazon doesn’t appear to be worried about debt. Its stock is $1,000 a share and keeps rising and as long as it does they can borrow from all sorts of markets.” With Amazon, Whole Foods may be able to escape its pricing challenges from the past and create serious competition and potential price wars with considerable contenders, such as Walmart and Target.

While Whole Foods and Amazon appeared to be a match-made in heaven, not everyone was initially on board with the merger. First, many are worried that Amazon’s immersion into the retail food business is premature and diverges significantly from its original business model. Also, critics felt that Whole Foods would alienate its core-customer base by expanding too rapidly. Additionally, the Federal Trade Commission, (“FTC”), was urged by Consumer Watchdog, a non-profit organization that advocates for consumer interests, to investigate a complaint concerning the merger. According to the complaint, Amazon “routinely uses inflated and fictitious previous prices to give consumers the misleading impression they’re getting a bargain.” If Amazon misleads its customers to believe that they are getting a bargain, issues would be exacerbated by bringing the high-end Whole Foods into the mix. However, the FTC eventually decided not to pursue an investigation and ultimately, gave Amazon and Whole Foods permission to move forward with the merger. While these companies face future challenges in implementing coherent business and pricing strategies, Amazon and Whole Foods have the potential to recreate both online and grocery shopping for generations to come.