Digesting Amazon's (AMZN) Competitive Strategy For Whole Foods

Amazon ()

Amazon ()

The prices of avocados and kale aren’t the only the things expected to fall on Monday when Amazon (AMZN) officially closes blockbuster deal for Whole Foods (WFM). The stock prices of some of Amazon’s competitors are poised to get discounted — much to the dismay of their shareholders.

As the two companies work to integrate their businesses, all customers will immediately see "lower prices on a selection of best-selling staples across [Whole Foods] stores,” Amazon said in a statement. The company also said eventually Prime members will receive "special savings and in-store benefits."

Wanting to emerge as market leader in the sector, Amazon wasted no time dictating food prices and, in the process, hinting at its long-term strategy for Whole Foods, which Amazon sees as a way to broaden its Prime shopper base. The company on Wednesday received the green light from the Federal Trade Commission that the deal with Whole Foods had passed the smell test and it was free to proceed with merger proceedings.

Often referred to as “Whole Paycheck” due to its high prices, Whole Foods was fighting a battle it seemingly couldn’t win on its own. The growing popularity of organic and nature foods had spawned a wage of cheaper alternatives products sold as stores such as Wal-Mart (WMT), Target (TGT) and Kroger (KR), among other locations.

Given the prime store location of Whole Foods has established, Amazon now has an entry into the $800 billion grocery business in the United States. But maintaining the “Whole Paycheck” moniker would go against what Amazon sees as a way to draw in a larger demographic beyond the affluent shoppers Whole Foods typically attracts. This dovetails perfectly into Amazon’s plan to merge Whole Foods existing customer rewards program with Prime, while increasing the number of price cuts on products once it fully integrates Prime into Whole Foods’ point-of-sales system.

The potential windfall Whole Foods can become for Amazon from the standpoint that it can drive higher Prime subscription members is enormous. And to the extent Prime members can grow will allow Amazon to keep Whole Foods’ prices lower, thus maintaining its leadership position in foods. Meanwhile, Whole Foods’ store locations, where some 470 stores are in North American and the United Kingdom, gives Amazon a strategic way to enhance its fulfillment initiatives.

First announced in June, the $13.7 billion offer for the upscale supermarket retailer sent shockwaves throughout the market. But news that Amazon plans to lower Whole Foods prices last week caused investors in prominent grocers such as Kroger (down 4.40%), Sprouts Farmers Market (SFM) (down 3%) and Supervalue (SVU) (down 3.5%) to run for the exits.

"The deal is happening and it will drive change in the grocery sector,” GlobalData Retail Managing Director Neil Saunders told CNBC. “Competitors will need to think about what that means for them and respond accordingly."

The carnage among grocers, which began last Wednesday shortly after Whole Foods’ shareholders voted to approve the deal, will likely continue through this week as investors digests the Whole Foods strategy, which Amazon is already using to force its competitors to respond.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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