Why Amazon May Stumble at Whole Foods

Last year's acquisition of Whole Foods Market by Amazon.com Inc. (AMZN) sent shock waves through the grocery industry, with competitors fearful that their already-thin margins would be under relentless assault by the cost-cutting e-commerce giant. The reality is, Bloomberg reports, that prices at the upscale grocery chain, on average, have barely budged since the $13.7 billion deal closed. Meanwhile, Amazon's plan to offer discounts at Whole Foods to its more than 100 million Prime members is a "limited" effort that will produce a "negligible" impact, according to a report from Loop Capital Markets cited by Barron's. (For more, see also: Amazon: Whole Foods Price Cuts to Boost Prime Subs.)

'Incredibly Stupid'

A more fundamental question is why Amazon sees a strategic rationale in cutting prices at all for the free-spending clientele at Whole Foods. "Converting upscale, quality-minded consumers into downscale, price-minded consumers" would be "incredibly stupid, since the most valuable brands are those that can command high prices and not get caught up in price wars," Inc. magazine observes. Moreover, they add, if the store moves in a downscale, low-price direction, "upscale customers will stop shopping at Whole Foods and start shopping somewhere that has a 'high quality at a high price' market positioning similar to the market positioning that Amazon is in the process of trashing."

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Mismatched 'Resources and Capabilities'

Amazon and Whole Foods represent a glaring mismatch of "resources and capabilities," according to Craig Crossland, a business professor at the University of Notre Dame, in a commentary for CNBC. He notes that Whole Foods pursued "a differentiation-based competitive advantage" through "brand value, customer service, quality and in-store experience," and cultivated an upscale customer base with a "willingness to pay above that of its competitors." By contrast, "Amazon is probably the poster child for a company pursuing a cost-based comparative advantage."

In fact, as Crossland argued in his piece written in June 2017, Amazon resembles cut-price, bare-bones, downscale grocer Aldi in many respects. In marked contrast to Whole Foods, Aldi's "value proposition is to provide acceptable-quality goods, most of which are private-label, at the lowest possible price, with no frills, minimal advertising, and a utilitarian in-store experience." 

Adding to his skepticism about the prospects for Whole Foods to represent a successful acquisition for Amazon, Crossland cited decades of academic research. While acquisitions of companies in related industries or markets often fail to deliver the anticipated synergies, acquisitions of unrelated businesses have an even spottier rate of success. (For more, see also: Amazon's Whole Foods to Meet With Angry Brands Next Week.)

Culture Clash

There also is a huge cultural mismatch. "Amazon's is a culture of relentless, largely impersonal efficiency, while Whole Foods has positioned itself as an organization that not only provides healthier, natural food, but also represents 'enlightened' values," Crossland wrote. Not only is this clash bound to produce tensions in the Whole Foods workforce, but it also is likely to alienate much of the core clientele of Whole Foods, in his opinion. Indeed, according to a report in Business Insider, Amazon is subjecting Whole Foods employees to relentless rounds of harsh performance reviews that are causing morale to crater. "I wake up in the middle of the night with nightmares," said one employee.

Price Reshuffling

Amazon made an initial price-cutting salvo at Whole Foods with a select group of staples, such as bananas and eggs. However, the price of a basket of more than 100 items at Whole Foods fell by a microscopic 0.1% from November to March, and is down by just 1.2% from August (right before the deal closed) to March, per Gordon Haskett Research Advisors, as reported by Bloomberg. Reductions in snack foods, dairy products and frozen items were offset by increases in baked goods, produce and beverages. The planned 10% discounts for Prime members do not appear to be that significant, additionally, since they will apply to a few hundred items, rather than everything that Whole Foods sells, Loop Capital notes. 

'Losing Sales and Pissing Off Customers'

Whether due to decreased morale, or to flaws in a new inventory management system called Order to Shelf, a mounting problem for Whole Foods has been bare shelves and slow restocking. "We are losing sales and pissing off customers," as one store manager told Business Insider. "Whole aisles are now Whole Foods deserts," per an opinion piece in Inc., a situation that this writer has observed firsthand. Pricing policy becomes largely irrelevant if merchandise is simply unavailable at any price.