Amazon's (AMZN -8.43%) newest price revisions at its Whole Foods Market subsidiary represent another attempt to increase traffic at the natural and organic grocer's locations. On The Motley Fool's Industry Focus: Consumer Goods podcast, our team breaks down why most of the price revisions are related to a single section of the store, and what this reveals about Whole Foods' inventory. We also discuss how the price action is meant to sell more Prime memberships for Amazon, of course!
A full transcript follows the video.
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This video was recorded on April 2, 2019.
Jason Moser: Speaking of food and technology, Whole Foods, which, as most listeners will probably know, was recently acquired by Amazon. Whole Foods is cutting prices again in their grocery stores. Asit, I saw this article last night. I saw the news break on Twitter that this was happening. I have to say, I wasn't personally surprised from it. I think when Whole Foods was acquired by Amazon, my thinking was that Amazon was going to use this opportunity to really flex that pricing muscle, so to speak. I don't mean pricing power and raising prices, I mean Amazon focusing on lowering prices and being as customer-centric as possible. So I'm not terribly surprised by this news. What about you? Were you surprised by this news at all?
Asit Sharma: Not really, but maybe surprised by where the price cuts are going to be. This starts tomorrow. Whole Foods says it's slashing prices on hundreds of items, but most all of them are produce items. They're going to save customers an average of 20% on these different produce items. I have few examples that I culled from the press release. If you like mangoes, large mangoes are $1 each.
Moser: I love mangoes! They're great!
Sharma: I've got family down in Florida. They're probably going to head there tomorrow and grab that. Exclusive deals for Prime members. They have about 150 Prime member deals a week. That is, if you have the Amazon Prime membership, you go into the Whole Foods, give them your phone number or account number, and you get an extra discount. They'll double that to 300. An example from the press release is, you'll be able to buy organic asparagus for $3 a pound, which will save you $2 a pound; or spiral-sliced ham for $4 a pound, a savings of 33%.
By going back to maybe what's a little surprising to me is that it's focused toward the green items. This is something that Whole Foods started before it was acquired from Amazon. They realized that their handling of inventory wasn't optimal. They grew organically, then had some smaller acquisitions, and grew so fast that Whole Foods never paid a lot of attention to how it managed its labor most efficiently, how it handled inventory items. It used to have a lot of shrinkage. So they already were applying technology to this area of the store before the acquisition. I guess it can only help if you're bought by Amazon.com and they've got so many logistics experts, as we just heard in your interview. They have such an acumen for making things more efficient. I believe this partially reflects the fact that they have been able to reduce the shrinkage -- that's spoilage -- of the produce. They have some innate or inherent margin there that they can give back up.
I think the other thing it also speaks to is this desire on Amazon's part to bring a lot of traffic into the stores and sell those Prime memberships. The Prime membership, obviously, this overarching moneymaker for Amazon. We see that they can use these stores to sell these memberships. They have a special offer starting tomorrow. If you're not a Prime customer through the end of this month, from tomorrow through the end of the month, you can try prime free for 30 days and you'll get a $10 off coupon for an order of $20 or more. This is the second leg. Yes, let's bring in more people to Whole Foods, but let's also sell those memberships.
Moser: Yeah. I think you made a really good point there in driving traffic. That really is the point of the grocery business. It's a low-margin business, no matter who you are. Really, the key is to bring as many people into that store as you possibly can and let them buy stuff. Not very often where you can sit there and just raise prices at will in a grocery store and keep your traffic levels up. Pricing is the easiest lever to pull, get more people in there, folks who aren't Prime members will get some exposure to that.
I think also, Amazon looks at, there's another example out there perhaps in Kroger. Kroger, which is a publicly traded company. They also own Harris Teeter, which is the higher-end version of Kroger, so to speak. When they bought Harris Teeter, they kept that Harris Teeter brand. So now you've got this big, 2,500-plus grocery store base around the country of Krogers and Harris Teeters, catering to customers of all price points. When we saw that news that Amazon was going to start opening up grocery stores under their name, not the Whole Foods name -- so I think we can assume that Amazon stores would be a little bit more value oriented. That will give them that value-oriented offering and higher-end offering with Whole Foods with the ultimate goal of just driving as much traffic in there as possible. Because, yeah, the Prime memberships are what really drive this business. It's all about buying more stuff from Amazon at the end of the day, whether it's on Amazon.com, or in a Whole Foods, or perhaps another Amazon grocery store.
Sharma: Yeah, for sure. We've seen that Amazon Go, which is their really tech-laden concept, and this announcement that you mentioned -- we heard in March that they're planning to have, they already have some leases signed, stores in their own name. That might be the next step up toward a more traditional grocery store. I like that analogy. I live in Raleigh, North Carolina. This is the home base for Harris Teeter, North Carolina. And we've got Kroger here, too, although they actually moved out of our metropolitan area because of some fierce grocery competition from other chains. It's a whole 'nother segment we can talk about, maybe in the future.
I think that's a great model. I think Amazon can profit by that. They're already setting out some hooks for this, Jason. There's 16 metropolitan areas where they've extended free delivery for Whole Foods shoppers if you're a member of Prime and you take advantage of the Prime service. Prime Now also lets you have either delivery or pickup. I personally have seen a lot more of these dedicated shoppers who are pulling together orders for customers who have ordered delivery through their Prime memberships. I think that that's going to be extended to this new branded store.
The overarching principle here is one of experimentation. They're using Whole Foods for a series of experiments, with discounting, with delivery. I think they're going to transfer that to this new brand, as well. But you're absolutely right. They'll have a nice upper-margin, higher-scale concept. They will have maybe a more conventional concept. They've got the Amazon Go store, which I'm sure they're going to continue to expand as well.