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Whole Foods Prices Will Drop Significantly After Amazon Deal

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Baby kale and avocados are about to go on sale

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Amazon buys Whole Foods Photo by Stephen Chernin/Getty Images

Whole Foods is about to lose its “Whole Paycheck” image thanks to one of this year’s biggest business deals: On June 16, Amazon announced it was buying Whole Foods for $13.7 billion. This week, Whole Foods shareholders voted to approve Amazon’s purchase price, the Federal Trade Commission confirmed it won’t block the deal, and the two companies announced that the merger would be complete as early as next week.

In the dustup, retail analysts, grocery store CEOs, and Silicon Valley pundits have been pondering the reasons for and impact of the purchase. Grocery and food researcher Mari Gallagher, a principal at Mari Gallagher Research & Consulting Group, might have put it best: “The middle customer has a Whole Foods aspiration but wants a Wal-Mart price.”

That appears to be what Amazon plans to deliver: In a release, the brand announced a few key changes that could go into effect by next week:

• Whole Foods’ shoppers will soon see lower prices on “best-selling grocery staples” including: “Whole Trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85% lean ground beef, creamy and crunchy almond butter, organic Gala and Fuji apples, organic rotisserie chicken, [and] 365 Everyday Value organic butter.”

• Eventually Amazon Prime customers will receive benefits and “special savings” when they shop at Whole Foods.

• Whole Foods’ private-label brands (365 and 365 Organic) are coming to Amazon.com, AmazonFresh, Prime Pantry, and Prime Now.

• In the near future, Amazon plans to put Amazon lockers in some Whole Foods stores so that shoppers can pick up Amazon deliveries or use the lockers to return goods back to Amazon.

• A spokesperson from Amazon says the company does not plan to lay off workers or “use automation to replace Whole Foods’ cashiers,” according to CNBC.

Amazon promises "more to come,” and Jeff Wilke, CEO of AmazonWorldwide Consumer, said in the release that the retail giant is “determined to make healthy and organic food affordable for everyone.” Whole Foods CEO John Mackey echoed that statement in his own, where he also pledged to “continue to expand our efforts to support and promote local products and suppliers.”

The merger has shaken the retail world, and in the wake of both the initial announcement and this week’s news, grocery stocks have taken a hit. But there are lingering questions. How will Amazon’s purchase of Whole Foods affect the grocery industry and restaurant world? And how much will it impact how and why Americans eat what they eat?

The Terms of the Deal

Amazon has long wanted to become a one-stop online shop, and groceries are the last — and, in some ways, largest — piece of the puzzle. The grocery industry is currently valued at $600 billion, and the company Jeff Bezos founded in 1994 has been trying to break into grocery since 2007, when it launched Fresh. In 2014, it expanded its online offerings with Prime Pantry, and this year, it has been experimenting with Go, a fully automated grocery store (without cashiers) in Seattle. Meanwhile, Whole Foods has needed help: Its stock has been falling for several years.

In many ways, this is a marriage of convenience. With Whole Foods, Amazon will control around 450 upscale grocery stores across the country, speeding up its plans to be one of the top five grocery sellers by 2025.

“This deal gives Amazon a physical home branch in the U.S. right away,” says Brian Frank, an investor and adviser for food and tech companies. “Now Amazon has a footprint with which to use Whole Foods as distribution centers for a broader blanketing of America with food on demand and delivery.”

In other words, when shoppers step into a Whole Foods, they’re not only walking into a grocery store but also entering an Amazon warehouse — one that’s now stocked with a much better grocery selection. Disregard the inventory, and Amazon has made a straightforward investment in physical real estate. According to several reports, the strip malls that feature Whole Foods Markets have shot up in value since the deal was first announced.

How Amazon Technology Will End Up in Whole Foods

Initially, the only major technological improvements Amazon plans to bring to Whole Foods are grocery delivery and Amazon lockers. But there is significant potential for the synergy to grow. “Whole Foods has always been trying to figure out how digital technology was going to influence their business,” Frank says. “Now they get Amazon’s expertise to integrate digital online and offline technology.” If Amazon synced the data from its Echo and Alexa platforms with transactional data from Whole Foods, well, we’d be in for some big changes.

“[Amazon will] be able to say, ‘I know you have these three things in your cabinet, I’ll send you these two additional things, based on the fact that you haven’t had it in three weeks and you liked it last time,’” Kenneth Sanford, adjunct professor at Boston College, told CNBC. Frank also expects meal kits to become a big deal. “The ability to put foods together in a recommended kit will be very easy,” he says, “given that they have technology to recommend things that go together.”

Amazon could also leverage its experience to make Whole Foods run more efficiently, moving the “inner aisle” goods that can be stored without climate control to other facilities or areas and focusing on streamlining the “outer aisles” (i.e., fresh produce, milk, and other perishable foods). The company also appears ready to apply its expertise in warehouse automation to Whole Foods’ private label products.

“If they can reduce costs, they can show that on the store shelves and move Whole Foods away from the Whole Paycheck image,” Gary Hawkins, CEO of the Center for Advancing Retail and Technology, told Bloomberg. If that happens, the company would be competing with Wal-Mart, Kroger, and other traditional, lower-cost grocery stores for market share (but more on that later).

How The Merger Will Affect Restaurants

There’s no doubt the deal will also impact the restaurant industry. According to a Euromonitor study, online restaurant sales were $12 billion in 2016, and they’re expected to grow 22.6 percent per year through 2020. In that same time period, general restaurant sales are only expected to increase 1.6 percent.

In order to stay competitive with options like Amazon Prime Now — the app that delivers restaurant meals in major markets like New York, San Francisco, and Dallas — restaurants will need to leverage technology in the form of ordering and payment apps as well as delivery. “This is another opportunity for people to get restaurant-quality food brought into their home,” says Warren Solochek, a restaurant-industry analyst at NPD Group.

“The health aspect is huge,” he continues. “If a meal is coming from Whole Foods, the belief is that it’s going to be healthier and fresher.” NPD has found that 54 percent of restaurant visitors are healthy eaters at home but only one-quarter eat healthily while dining out. In other words, those committed to healthy eating all the time might substitute prepared meals from Whole Foods for restaurant meals at a higher level and rate. Solochek imagines Amazon might use Whole Foods locations as a commissary to prepare healthy meals that it then picks up and delivers — maybe along with some groceries, as well, so that shoppers and diners can kill two birds with one stone.

Grocerants (grocery stores with restaurants inside) are not going away any time soon. “More than 40 percent of Americans buy freshly prepared foods from grocery stores,” USA Today reported in April. Almost every Whole Foods now includes several fast-casual kiosks offering everything from hot soup to fresh sushi, and many locations include full-service restaurants. Amazon could add technology to the mix to create "more of an all-encompassing experience," Karyl Leggio, a professor of finance at Loyola University’s Sellinger School of Business, told USA Today, envisioning how tablets could be incorporated into seating areas for easier online shopping. When customers finish their meals, their groceries could be waiting and packed for them by the door.

Then there’s the question of full-service restaurants. In June, Whole Foods opened its first one, a fast-casual Brazilian concept called Roast in Atlanta helmed by Top Chef contestant Kevin Gillespie. It hasn’t announced any plans for more restaurants, but this could be an interesting growth space for the company. Meanwhile, Wal-Mart, America’s current largest organic grocer, is now dabbling in the grocerant space.

How the Merger Will Affect Grocery Stores and Producers

Amazon’s purchase will shake up the food and grocery world just as the online retailer did for the book world in 2000. Today, 64 percent of U.S. households have Prime memberships, and the grocery area sure to be impacted most heavily is delivery: The grocery delivery service Instacart, in particular, faces an uphill battle. Before this shakeup, experts expected to see online grocery delivery become a $9.4 billion industry in 2017, a 9.5 percent yearly growth. Now “it will go into hyper-growth mode,” predicts Daphne Carmeli of Deliv, a same-day delivery service based in Silicon Valley.

Yet Amazon will have to figure out how to deliver perishable products. After all, “the complexity of selling books is much different than the complexity of selling food,” Frank says. The company will have to crack storage issues as well as the fact that most consumers want their food immediately, without planning ahead. Frank imagines that “instead of having five warehouses across the U.S. that can service all places in the U.S. within 48 hours, they will have to have 1,000 warehouses that can service anybody within an hour or two.”

If Amazon can resolve those issues, it will be able to become the one-stop shop of its dreams. As a recent Jimmy Kimmel skit joked, Amazon’s acquisition could mean Whole Foods shoppers will be encouraged to sign up for subscriptions to items like parmesan, basil, and walnuts so home cooks will always have the ingredients for pesto on hand. Frank posits that Amazon could offer dynamic pricing on food the way it does on, say, batteries, so that everyone will be able to afford to grocery shop online. “Technology will democratize access and over time hopefully will create efficiencies that will reduce price,” he says.

This could be a game-changer for what Gallagher calls the middle market. She believes that with this news, we’ll see grocery stores “reinventing themselves or merging or consolidating with companies their size to have more dollars to strengthen communication and their brand.”

But others see it as a more malicious proposition. “This is monopoly capitalism in action,” says Marion Nestle, nutritionist and food studies expert. “Shouldn’t the anti-trust folks be concerned? Not these days, I guess.”

Barry C. Lynn, the director of the Open Markets Program at New America, likens Amazon’s expansion to Wal-Mart’s several years ago. “This is essentially the same thing,” he says, “but at a bigger scale and with more knowledge and ability to micromanage. We’ve seen how they drove powerful book retailers out of business, and we should expect the same thing in groceries.” Though chains like Kroger and Wal-Mart aren’t likely to go out of business, they will certainly replicate Amazon’s successful business models.

Lynn is also concerned about what Amazon’s new influence will mean for smaller artisan producers. Even though Mackey promises to continue supporting local purveyors, it’s unclear how long this can last. “Amazon just captured control over Whole Foods’ many smaller suppliers,” Lynn says, noting that the company “can immediately leverage power over organic, local suppliers.” He worries that if artisans don’t go along with Amazon’s pricing models, they could be banned from the platform, the way the company refused to sell e-books published by Hachette several years ago.

On the other hand, Frank thinks Amazon’s site is the perfect place for producers to tell intricate backstories about their products that make an organic tomato, say, much more than a tomato that costs $3. Comments could deepen those interactions and lead to grocery shopping on a new level.

At the end of the aisle, that’s what this is really about. Amazon bought Whole Foods to innovate on a new playground, one full of organic ginger snaps, locally grown lettuce, and a host of technologies and services shoppers can only begin to imagine.

Megan Giller is a food writer and expert on chocolate. Her new book, Bean-to-Bar Chocolate: America’s Craft Chocolate Revolution: The Origins, the Makers, and the Mind-Blowing Flavors will be published on September 19.
Editor: Daniela Galarza

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