Amazon’s takeover of Whole Foods looks set to complete on Monday, and the Everything Mega-Monopoly Store has already announced there will be price cuts on everything from avocados and bananas to organic eggs and responsibly farmed salmon.
Share prices of competing retail stocks shuddered in response understandably:
That’s the Euro Stoxx retail sector.
But should they really be that worried?
Amazon may be exceptionally accomplished at managing warehouses and logistics, which are seamlessly integrated into an online purchasing experience. But the conglomerate is much less accomplished at dealing with the awkward and annoying reality of real-world customer-facing operations.
Nor does Amazon have much experience with the high-end, fussy-as-hell “price is no barrier to us” spectrum of the market.
So here’s the issue with Amazon’s sensational price cutting policy.
It mostly serves the interests of bargain hunters who are happy to waive “experience” in exchange for cheaply priced goods obtained any old way possible (i.e. sans glamorous setting, sans sophisticated packaging and sans convenient retail presence) . It doesn’t necessarily serve the interests of the “quality and experience comes before everything” customer segment.
If Whole Foods customers wanted cheaper organic avocados, they’d already be shopping at Waitrose, Sainsbury, Costco or Walmart.
They, however, opt to shop in Whole Foods precisely because it represents an overt act of conscious inefficiency.The same impulse drives the same type of customer to overspend for vegan organic burgers at Borough market.
Brandon Fletcher at Bernstein echoes a similar point on Friday. As he observes (our emphasis):
The quinoa elite and main line groceries serve different customers and don’t directly translate. Second, the funding source of an inefficient WFM is large, but not inexhaustible. It is notable that the list of items with price reductions are important items, but not really that broad. This is more like a sale than a permanent roll back of ‘whole paycheck’ pricing. As Amazon gets WFM costs down it will pass all the savings down in price, but it is hard to see that gap to Costco (which we shared before as being 30-80 percent) closing. Walmart just plain does not sell the same items nor serve the same customers.
And he offers a thought experiment to boot.
Had Whole Foods announced a similar price cutting policy independent of the Amazon acquisition, would WFM stock have gone up or down? Chances are the answer is down, because the WFM model depends on higher costs to provide assortment and service.
So his point is, yes, Amazon can subsidise anything if it puts its heart to it. But that doesn’t mean it’s necessarily adding value.
And here’s the key conclusion:
…at some point if their actions are value destruction and not disruption, the narrative may change as you can disrupt infinitely, but destroy only to the limits of the balance sheet. We think that speed limit leaves the strongest incumbents largely unharmed. Walmart, Target, Costco and Dollar General will face pressure but will survive based on their strategic differences from Amazon.
This is fundamental not just to the Whole Foods acquisition, but to Amazon’s entire expansion plan. If what Amazon really is is a value destroyer rather than a value disrupter, all its mega monopoly policy of undercutting-competition-until-it-dies will do is lower quality for everyone in the long run.
For the discerning quality-obsessed customer, that’s never going to cut it. Luxury retailers will always offer an edge. And for Amazon that’s a problem, because you can’t disrupt a luxury experience with technology. The whole point of a luxury “organic” “farmer’s market” experience is purposeful inefficiency.
Price isn’t everything.