The price war in the retail groceries market is now set to intensify.
With Amazon.com successfully navigating the landmine of antitrust scrutiny for it’s acquisition of Whole Foods Market Inc, the shares of rival groceries have started to tumble on growing fears that the brutal war for market dominance will intensify.
The shares prices of Kroger Co, the biggest U.S. supermarket operator, have slipped by 8% while Wal-Mart’s have fallen by 2%.
Amazon has now disclosed it will start selling Whole Foods brand products on its website. The move triggered a fall in the share prices of Kellogg Co, a packaged food sellers.
The S&P 500 Food Retail index closed down almost 5% wiping out $10 billion in market value from the sellers of big food.
Amazon has clarified that members of its $99-per-year Prime shopping club will eventually be rolled into Whole Foods’ customer rewards program and be eligible for special offers and discounts.
“There was never any doubt that Amazon would lower prices, and even offer further discounts in-store to Prime members,” said Baird Equity Research analyst Colin Sebastian.
Putting other grocers on notice, Amazon stated that starting on Monday it will cut prices on organic grocery staples, including avocados, bananas, farmed salmon, brown eggs, lettuce, tilapia, some apples, baby kale, butter and other products.
“It does not look like they will go kamikaze on pricing,” said Roger Davidson, president of Oakton Advisory Group, a consulting firm. “They will lower prices on consequential items to drive traffic and sales but not do a whole store price reduction which could really damage gross margin and potentially wipe out operating margin.”
The strategy of lowering prices could stem defections by price-sensitive Whole Foods shoppers and is also likely to draw in new consumers.
“It’s ultimately a nice land grab,” said Bill Bishop of Brick Meets Click, a retail consultancy.
“Amazon is more focused on driving volume and improving service at the expense of profit margins,” said Sebastian. “Long-term, this strategy works because the absolute profit dollars can still be significant.”
“In some cases grocery retailers have had to invest between $500 million to $1 billion in order to reduce prices to a level that retained customers and resulted in a net increase in customers,” said Brittain Ladd, who until earlier this year working as a senior manager at AmazonFresh, Amazon’s grocery delivery service.
John Mackey will continue to remain as Whole Foods’ chief executive and the company will operate as Amazon.com’s subsidiary and continue to be headquartered in Austin, Texas, said both companies in a statement on Thursday.