Please ensure Javascript is enabled for purposes of website accessibility

Were Whole Foods' Price Cuts Just an Amazon.com Gimmick?

By Rich Duprey - Updated Oct 23, 2017 at 1:39PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Lower prices at the organic grocer may not be as cheap as you think.

While Amazon.com's (AMZN -2.78%) purchase of Whole Foods Market looks like it was a picture-perfect wedding, it appears that the price cuts enacted almost immediately after the marriage was consummated were little more than a gimmick to get people in the door. Despite all the publicity, prices are barely lower than they were before the merger.

Shedding the "Whole Paycheck" image

It was well known that Whole Foods couldn't shake its "Whole Paycheck" image because of the cost of shopping there -- not even after introducing its 365 by Whole Foods private-label brand, which on many items sported prices lower than you'd find even at Wal-Mart (WMT 0.32%). The grocery store was still seen as a supermarket destination for the well-to-do rather than for middle America.

The exterior of a Whole Foods store in Harlem

Image source: Whole Foods Market.

That's why Jeff Bezos' strategy to initiate widespread price cuts was such a smart move. Intense grocery store competition grew even more so as organic produce prices got cheaper, so the move made it look as if Amazon -- along with Whole Foods -- was ready to go up against Wal-Mart, Kroger (KR 0.52%), and other chains where it mattered most: the pocketbook. But looks, apparently, can be deceiving.

The Washington Post reported that 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.

Moreover, while some goods saw their prices cut sharply early on, they've begun creeping back up as time wears on. According to the report, frozen-food prices were 7% higher on Sept. 26 than they were on Aug. 28, when Amazon closed the deal, while snack foods were up 5.3%, and dairy and yogurt were 2% more.

The best deals could be found on bakery items, which were down 6.8%; beverages, which were 2.8% lower; and produce, which was down slightly at 0.5%. Most items in the store, some 70%, remain unchanged.

Bread and bakery goods

Image source: Getty Images.

Some goods deserve to be more expensive

So was all the hoopla just that -- a bit of smoke and mirrors to get people to try out the store and put aside preconceived notions before ultimately reaffirming those widely held beliefs?

It was probably a little bit of showmanship alongside smart business sense. Analysts note that consumers will more easily notice lowering prices on everyday items like bread, and because the 365 brand carries higher profit margins, Amazon has more room to play with when deciding pricing. And because frozen goods come with higher built-in costs, like the electricity needed to run freezers, it's easier to cut prices elsewhere.

The grocery store business is already one that runs on very tight margins, historically in the 2% to 3% range, and no one sells more groceries than Wal-Mart. Some 56% of the retailer's $486 billion in total annual sales comes from groceries, or about $272 billion, which is about 10 times more than Kroger alone sells, and nearly three times the combined annual sales of Albertson's, Kroger, and SUPERVALU (SVU).

Whole lotta new customers

Whole Foods, of course, needed a jolt to change direction. It has been suffering from falling same-store sales for eight straight quarters, and the Amazon.com acquisition definitely sent out shockwaves, knocking back retailers in a number of industries. And the price-cut bonanza may have been enough to change the direction.

Aerial shot of parking lot

Image source: Getty Images.

E-commerce data firm One Click Retail says in the first week of Amazon's ownership, customers stampeded in and bought $500,000 worth of goods from Whole Foods, with only 7% of the top 100 items left in stock at the time. CNBC reported that satellite imagery analysis produced by JPMorgan Chase showed 4.6% increase in parking lot traffic in September, the biggest year-over-year jump in three years, while Bloomberg said there was a 33% increase in traffic from new shoppers in the first week Amazon owned the grocer.

But that could all just be some very ephemeral gains. Bezos has shown that people obviously want to shop at Whole Foods Market if the price is right, but they won't do so if they discover that all he's using is gimmicks to lure them in the door.

Editor's note: The dollar value of goods customers reportedly bought from Whole Foods in the first week of Amazon's ownership has been corrected to $500,000.  

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$113.22 (-2.78%) $-3.24
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$124.12 (0.32%) $0.40
The Kroger Co. Stock Quote
The Kroger Co.
KR
$48.70 (0.52%) $0.25
SUPERVALU Inc. Stock Quote
SUPERVALU Inc.
SVU

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.