Victoria Gustafson is the CPG/grocery strategy vertical lead at Astound Commerce.
Amazon is continuing to fulfill its promise to cut prices at Whole Foods, making the retailer accessible to more Americans and gaining share in the extremely competitive U.S. grocery market.
For grocers, staying relevant is going to ride on their ability to compete with Amazon’s offensive. Thinking strategically about how they can differentiate themselves through localization and shopper insights, valuable in-store merchandising and convenience will be critical maintaining their share of the market.
Whole Foods shakes up the game with price cuts
When the acquisition was announced in August, consumers were excited to see that Whole Foods would be reducing prices. However, the first rounds of cuts included only around 12 items in a press release centered on what the company considered “staples.” The list included salmon, kale, and free-range eggs — products that aren’t mainstream staples in most homes. Even after the announcement was made and prices cut, they started crawling back up in major markets… so, Whole Foods went for a more meaningful price slashing do-over a couple months later.
November price cuts were different from the ones in August — they were a signal that Amazon is ready to pursue a more aggressive strategy to compete with mainstream grocers. Amazon announced these products just before the Thanksgiving holiday, ensuring that competitors would have little time to react: a huge shot across the bow to every other grocer. The price cuts also included products from well-known national brands, like Chobani. It’s clear that Amazon has the power to negotiate with big players, a strength not every grocer can boast, and one that's sending ripples through the entire industry.
Additionally, this move marked the first time Prime members received exclusive discounts on products. Members of Amazon’s loyalty program saved an additional 50 cents per pound on turkey, showing that Amazon is slowly integrating the Prime program within Whole Foods.
Amazon’s Whole Foods strategy
It’s clear that Amazon is only getting started with Whole Foods, and that there’s more in store for Prime members. With Whole Foods notably absent from the list of retailers with loyalty programs, Amazon’s Prime is the only vehicle for the company to get detailed data on their consumer So, Amazon has an extra incentive to push Prime members to take their grocery shopping to Whole Foods. The more Prime members buy groceries, the more Amazon will know about their purchasing habits, and the more their future moves will be grounded in shopper insights, leading to higher returns on merchandising investments. Converting non-Prime members shopping at Whole Foods into Prime members is also a high reaching goal. Whole Foods shoppers tend to be in higher income brackets, with disposable income to spare on physical goods and entertaining — areas where Amazon is making major investments.
Right now, Amazon is limited by Whole Foods’ physical locations, in-store technology and lack of historical loyalty data on its customers. This somewhat mitigates the speed of their offensive. For example, to receive Thanksgiving discounts, Prime members had to physically print out emailed coupons to use in-store. As Amazon polishes in-store tech, Prime members (who are already benefiting from their membership) will see a more seamless experience in-store and better benefits.
Recent price moves highlight the impressive agility of both Amazon and Whole Foods — the companies can move with speed, and they’re not afraid to use ruthless tactics like surprise price cuts right before a holiday. It also speaks to their power in the marketplace, which enabled them to negotiate and secure these discounts so quickly in an industry where it’s not unusual to see a discount calendar set 6 months in advance.
That’s not to say Whole Foods holds all the cards. There are several substantial obstacles along the way before the company can truly reach mainstream penetration. For one, Whole Foods only has around 400 locations — a small footprint compared to a competitor like Kroger, which has 3,000. Whole Foods is also competing with retailers with dozens of years of experience in highly complicated shopper analytics, which Whole Foods does not have, putting them at a disadvantage. They only recently gained access to grocery market data through their agreement with Nielsen, but it will take some time to develop internal capabilities and discipline to fully leverage market analytics on par with their competitors.
Additionally, they have to continue fighting the “Whole Paycheck” legacy to win over customers that have stayed away due to high prices. It will take more than a Thanksgiving discount on a handful of items to shed this reputation.
So what can grocers do?
First, grocers need to understand that the rules of the game are changing. Whereas grocers have often been reluctant to make waves, the Whole Foods acquisition shows that they shouldn’t be afraid to be bold and make public moves. For example, while Whole Foods cutting prices on a few items isn’t really groundbreaking, the retailer is making it big news in hope of drawing more shoppers.
Supermarkets need to counter this with strategic, creative moves that may squeeze the budget. It will cost money in the short run, but it’s necessary in the wake of buzzworthy promotions from Amazon. Jewel Osco, for example, offered a promotion for $25 off a customer’s first order of $100 online (a strategy not only attract shoppers, but to introduce them to new digital offerings).
One useful tactic to combat Amazon's growing power is hyperlocalization. Whole Foods and the e-commerce giant don’t currently have the customer data to tailor product inventories narrowly, so other grocers have a leg up. They also don’t have the grocery market penetration across the country to offer truly seasonal, local products. Retailers need to emphasize their expertise in this area, which can be a strong short-term strategy to ensure that these new promotions doesn’t lure too many customers to Whole Foods. They also need to make sure that this lure has staying power, using it as a long-term strategy to showcase unique products targeted specifically to local consumers.
It will take time before Amazon and Whole Foods perfect their strategy, but we can expect that their bold announcements will continue to disrupt the industry. Grocery retailers can survive by flawlessly executing the fundamentals — knowing their shoppers and offering relevant assortment at competitive prices. But supermarkets must also adapt to the changing marketplace — increasing their agility and reducing the speed of their reactions to competitive moves. Retailers must also improve their digital presence and online shopping experience, and leverage shopper analytics to stay one step ahead of Amazon’s game. Those who perfect these approaches will survive, while those who lag behind will experience the same fate of many stores who have fallen victim to Amazon’s offensive in other categories.