WFM Whole Foods Market, Inc.

By Laura Stevens and Heather Haddon 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 25, 2017).

Amazon.com Inc. said it would begin slashing prices on grocery items from bananas to baby kale at its new Whole Foods Market unit right away, serving notice that the e-commerce giant plans to move quickly to shake up the supermarket industry with its $13.7 billion acquisition.

The announcement Thursday, which sent stocks of traditional grocers into a fresh tailspin, said price changes for both staples and more high-end foods would go into effect as soon as Amazon closes the Whole Foods deal on Monday. The company also said its Amazon Prime program, which analysts estimate has more than 60 million members, will become Whole Foods's customer-rewards program and that new deals at the supermarket chain will be available through Prime.

"We're determined to make healthy and organic food affordable for everyone," said Jeff Wilke, Chief Executive of Amazon Worldwide Consumer.

Stocks for six large food retailers, including Kroger Co. and Wal-Mart Stores Inc., lost around $12 billion in value after the announcement. Shares of grocery-store companies had already been battered since the deal was announced in June, and analysts say they expect grocery stocks could fall further.

Grocers and investors say they are concerned that Amazon could start a price war as it works to broaden the reach of a chain that has long focused mainly on higher-income shoppers. Amazon has often sold items at break-even or a loss to gain market share in sectors it sees as a priority, a strategy that former Amazon executives said it is likely to replicate in groceries.

"The reality is that Amazon has done this with every part of their business to create customer loyalty," says James Thomson, a former Amazon executive who advises brands on their online strategies. "Yes, it's lower margins, but it's about the long term."

But grocers, suffering from lethargic growth, could struggle to compete. They already spar over price on the most commonly purchased items such as bananas and eggs, and would sacrifice already thin margins to go lower.

Even moderate drops in Whole Foods's more-expensive items could hurt traditional grocers given the high quality of Whole Foods's stores, said Rupesh Parikh, senior equity research analyst at Oppenheimer & Co. Inc. "Even if they get closer to some of the peers, that could have a detrimental impact," Mr. Parikh said.

Kroger, the largest U.S. grocery chain by stores and revenue, already dropped prices this year, and is closely watching how competitors respond. "It's less expensive to keep your customers in your store with the crazy price than trying to get them back if they start shopping somewhere else for milk and eggs," Mike Schlotman, Kroger's chief financial officer, said in a recent interview.

Shares of Kroger fell by more than 8% on Thursday, while those in Wal-Mart and Costco Wholesale Corp. also traded lower. Shares in United Natural Foods, Inc., Whole Foods's main distributor, fell by more than 5%.

Amazon "believes that lower prices drive traffic," says Eric Heller, a former Amazon executive who now works with brands selling to the company. "Products that have a higher-than-perceived quality, and a lower-than-expected price drive customer loyalty."

Other foods Amazon selected for price cuts -- such as almond butter and organic salmon -- tend to be pricier and more targeted to core shoppers.

Whole Foods once dominated the natural food market, but Wal-Mart, Costco and other mainstream retailers have rapidly expanded their organic offerings at cheaper prices. Kroger sold around $16 billion in natural and organic products last fiscal year, roughly equal to Whole Foods's total sales.

Now Whole Foods items will get a massive new distribution channel. Whole Foods's private-label items, such as the 365 Everyday Value brand, will be sold on Amazon.

There is a big overlap between the two retailers already. A Morgan Stanley survey shows about 62% of Whole Foods shoppers are members of Amazon's Prime service, opening the door for cross-selling to entice customers who shop at both to spend more.

Amazon's discussion of its plans in Thursday's announcement was brief, but it provided the first details of its intentions for a deal that will give the online retailer a network of more than 460 brick-and-mortar stores. Some of those stores will soon have Amazon's in-store lockers for package pickups, Amazon said. The lockers could be a first step in reducing Amazon's delivery costs by offering customers more pickup or delivery options. Wal-Mart, for instance, over the past couple of years started rolling out curbside grocery pickup to hundreds of its stores.

Prime, which costs $99 annually and offers perks including unlimited two-day shipping, is a cornerstone of the integration. Prime will be incorporated into Whole Foods's point-of-sales system starting Monday, and membership benefits will be added later.

The two companies hadn't determined exactly what a combination would look like before announcing the deal, because it came together in about six weeks. Amazon revealed its plans a day after it received Federal Trade Commission approval on the deal and Whole Foods shareholders voted in favor of it.

Whole Foods, based in Austin, Texas, began lowering prices roughly two years ago to reverse a sales slump. It also ran promotions and advertised on television for the first time in years.

Still, Whole Foods continued to lose sales and shopper surveys have shown that many customers believe the chain is too expensive. A Morgan Stanley survey earlier this month found that while Whole Foods prices were down slightly from last year, they still were roughly 15% higher on average than regional supermarkets.

Sarah Lustberg, 28 years old, shops at her nearby Whole Foods in New Orleans primarily for produce and "splurge meals," but she does the other half of her grocery shopping at a nearby regional chain. She says she plans to shop at Whole Foods more if prices go lower.

"We really do prefer going to Whole Foods, and the only reason we don't shop there more right now is because of the prices," said Ms. Lustberg, who works in customer service. She is also a Prime member who orders online frequently for her seven-month-old baby. "I think I am single-handedly keeping Amazon in business," she said.

Austen Hufford contributed to this article.

Write to Laura Stevens at laura.stevens@wsj.com and Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

August 25, 2017 02:47 ET (06:47 GMT)

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