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Are Lower Prices Enough for Whole Foods to Win Market Share?

By Adam Levy - Aug 31, 2017 at 5:05PM

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Amazon's first order of business at Whole Foods is to cut prices. But it probably needs a second act. (AMZN 2.07%) didn't take long to cut prices at Whole Foods Market stores after it took control. Prices for certain grocery staples fell as much as 43% on Monday, moving toward Amazon's goal of making healthy, organic food accessible to everyone.

But Whole Foods isn't the only organic grocer in town anymore. Wal-Mart (WMT 1.85%) and Costco (COST 0.94%) have added lots of organic products to their shelves. Importantly, both of them offer competitive prices even after Whole Foods' price cuts.

So as Whole Foods fights to take a larger share of the grocery market, lower prices might not be enough.

Woman pushing cart in front of Whole Foods Market sign.

Image source: Whole Foods Market

Analysts think price cuts are key

Whole Foods' prices are a big barrier for many consumers. A survey from Morgan Stanley's research division found 70% of consumers who don't shop at Whole Foods list price as the main barrier. Analyst Brian Nowak wrote that the prices at Whole Foods are 14% higher than at the average grocery store.

KeyBanc's Brent Bracelin took a survey of 13 items and found a 22% average price cut on Monday. He says the price cut should bridge the gap between Whole Foods and its lower-priced competitors.

The strategy has worked for Amazon before. Cutting prices on books, electronics, and everything else allowed it to grab the lion's share of online sales.

But that strategy comes at the cost of profit margin. Still, Whole Foods' margin has a bit of fat, which Amazon can afford to trim, especially if it results in the same success it had with the strategy online.

No one-stop shopping

Whole Foods' shelves are stocked full of items that are organic, chemical-free, additive-free -- and now less expensive. And while people love that in their meat and produce, sometimes they might just want some unhealthy snacks full of MSG and artificial flavors. But you won't find any delicious junk food in Whole Foods.

As Bloomberg's Sarah Halzack put it, "Unlike its new corporate parent, Whole Foods simply is not an 'everything store.'" And with Wal-Mart and Costco stocking a wider variety of healthy and less healthy foods alike, along with regular household items, they have a major advantage in terms of convenience.

So while Amazon's price cuts bring Whole Foods's prices more in line with prices for organic goods at bigger competitors, Whole Foods is still at a disadvantage to attract shoppers, since it has less product selection.

Over 70% of people in a Statista survey said "best value for the money" is one of the factors they consider when grocery shopping. That's right in line with the Morgan Stanley survey.

But around 57% said their grocery store choice is determined by which one always has their products in stock. If a person exclusively eats Whole Foods-type foods, then the price cuts should bring them into the store. But just 28% of shoppers are concerned about the selection of organic products. They may well want the delicious junk food.

On top of that, Whole Foods has a reputation for high prices to deal with. Wal-Mart and Costco are known for low prices and good value. On the other hand, Wal-Mart has a reputation to deal with itself, for low-quality items and poor customer service.

It will take more than price cuts, but Amazon has the tools

Amazon already has plans to integrate some of its online retail infrastructure with Whole Foods. It's going to install Amazon Lockers in some Whole Foods locations, which will allow customers to pick up Amazon orders and get their grocery shopping done in one location.

Perhaps more importantly, it plans to integrate Prime with Whole Foods, making it the grocer's rewards program. Prime members will get additional discounts and special in-store experiences, which ought to foster more loyalty. Prime has been a huge factor in Amazon's ability to keep taking share of online commerce, and it could be a key factor in winning market share in groceries as well.

Price cuts are just the start for an Amazon-owned Whole Foods. It's a strategy Amazon is familiar with and has had a lot of success with in the past. Amazon will find more ways to drive traffic to the stores through integration with its popular online platform, and it could eventually use Whole Foods as a way to drive online sales.

Adam Levy owns shares of Amazon. 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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