After Amazon bought Whole Foods in 2017 I wrote a post, Amazon Unlikely to Start Grocery Price War. This past week, Amazon announced some price reductions, Amazon Cuts More Prices at Whole Foods. So, was I wrong in my original post? No, but market competition has increased, and the company is adjusting accordingly. I still expect them to maintain a premium pricing strategy.
In my 2017 article, I argued that Amazon’s primary competitive weapon is not low prices. They compete on convenience, efficiency, quick deliveries, and the value of their network. Although the company began as a low-price provider, they no longer have the lowest prices on national brands. If you don’t believe it, do some comparisons. Sometimes their prices will be lower, but more often they are comparable to competitors. Amazon’s customers are loyal because it is so easy to order and receive your products at your door quickly.
After being acquired, Whole Foods lowered some prices, but in general retained premium prices. Just last summer, Whole Foods still hasn’t shed its whole paycheck status reminded us of that fact. The most recent price cuts are more an indication of changes in the market, than changes in the Amazon pricing strategy.
Whole Foods built a large following with a reputation of providing healthy options, including organic foods and non-GMO foods. Customers’ perceptions were that the company cared about their health and could educate them about healthier eating. For those things, people have been willing to pay more than they pay for food at national grocery chains who did not have reputations of offering similarly healthy choices. Naturally, Whole Foods tried to capture that perceived value with premium prices.
I have written in several blog posts that customers determine value compared to their next best alternative. When there is greater competition (more alternatives), value premiums tend to shrink. Lately, it appears that competition is making a big difference in customer perception of Whole Foods’ value. Over the past several years, national, regional, and local grocery companies have vastly expanded their healthy food choices. They all have sections with organic produce and meats, and they all offer a range of non-GMO products. No longer is Whole Foods the only option for healthier food. Customers who previously traveled past their local grocery to shop at Whole Foods, now may not be as willing to do so and the value premium they are willing to pay is declining.
I am sure many will disagree with my next point, but I believe another change in the market (unrelated to competitive intensity) is a slight change in attitudes about organic and GMO foods. There have been plenty of studies that have shown genetically modified foods are just as safe and healthy as non-GMO. Similarly, although there may be modest differences with organic produce, those differences decrease or disappear if you wash the produce. The price premium for organic and non-GMO items has historically been substantial, but if the products are not demonstrably better for the buyer, customers will not pay a large premium for them. I suspect this is having a slight impact on the perceived value of Whole Foods.
A premium pricing strategy that attempts to capture the value customers place on your products does not mean you can charge anything you want. It means you can charge more than competitors when your products and service are preferred by the customers – when you add value to them. The amount of that value can and will change as competitive offerings and other market conditions change. Your premium prices need to change (up or down) as the relative value changes.
I am not an insider at Amazon, and I am not privy to their pricing strategy deliberations. However, I don’t think they are trying to be the low-price leader in groceries and I still don’t expect them to start a price war. I think the market in which Whole Foods competes has changed, and their prices are being adjusted to reflect those changes. I still expect Whole Foods to sell their products at premium prices compared to other grocery chains.
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