The big news: Amazon will lower prices at Whole Foods on day one.
To anyone who spends time watching Amazon, this will not be a surprise. However, it is a great opportunity to learn a lesson: Pricing must be consistent with corporate strategy.
Amazon’s corporate strategy is to be the one-stop shop for retail, and a key part of that is to make sure everyone perceives Amazon’s prices as low. Whole Foods, often nicknamed “Whole Paycheck,” is the opposite of that perception.
The winner? Amazon’s corporate strategy. The company has announced it is lowering prices at Whole Foods on the day the deal closes.
As a pricing guy, I often say that the only good reason for lowering prices is to match competitors’ price decreases. This is an exception. Because Amazon is integrating Whole Foods into its normal business, using the brick and mortar stores to help with delivery and returns and beefing up the grocery business, Whole Foods must conform to the Amazon price brand, and its corporate strategy.
An alternative could have been if Amazon wanted to leave Whole Foods as a wholly-owned subsidiary, it could have left prices high and reaped the profits. There were likely some synergies between the two that would have grown both businesses. This is essentially what Amazon did with Zappos. It let Zappos keep its own brand.
However, this doesn’t seem likely with Whole Foods. By tightly integrating Whole Foods into their operations, Amazon needs to have one consistent price brand. That will not be as easy as it sounds. Whole Foods has an established price brand: high price, high quality. It is difficult to change a company’s price brand. For example, remember what happened when J.C. Penney tried to shift from frequent sales events and coupons to everyday low pricing. It hurt them badly.
The challenge for Amazon is to lower prices at Whole Foods without hurting the brand. If it hurts the Whole Foods brand that will certainly open the market for another high-end grocery space to grow. But why would Amazon care if another high-end brick-and-mortar grocer comes along?
My prediction (I’m horrible at these) is that the Whole Foods price brand will slowly change. It will become more like other big grocers (e.g., Kroger, Safeway). Its quality and selection will follow the same trends as the big grocers. And a new high-end grocery will take the space that Whole Foods owns today.
Regardless of the accuracy of my prediction, the lesson is that corporate strategy is key. Your prices must be consistent with your company’s strategy.