Why Amazon-driven price changes at Whole Foods WON’T start a grocery price war
Billions of dollars in market value recently evaporated (yes, just disappeared) due to fears that Amazon’s purchase of Whole Foods would trigger an uptick in price competition and negatively impact the profits of a broad range of grocery retailers. So far that hasn’t happened, and in fact it quite likely won’t – ever.
Here are reasons why I offer this contrary yet actually quite rational perspective on why Amazon’s price drops at Whole Foods won’t start a price war.
1. Recent experience shows that Amazon typically doesn’t price below the market.
Instead they move quickly to narrow the price gap with the price leader, but typically don’t even try to match them. Being two or three percentage points higher is enough to make Amazon competitive.
2. Price competition in grocery is about building a price reputation, and that depends on how the reduced prices are served up to customers.
The art of creating strong price reputation isn’t about reducing thousands of prices, it turns on how effectively the retailer:
- Prices “known value items,” the short list of prices most shoppers know (a gallon milk, a pound of bananas, a dozen eggs, etc.
- Blends the prices of promoted products and those sold at regular shelf price so consumers feel that they’re getting a good (or at least reasonable) price on their total purchase.
3. There’s a limit to the amount of market share that can be earned by price cuts.
The retail grocery market is already segmented, and consumers are doing fewer price comparisons across stores in these different segments. This means it’s difficult to justify the price reductions with sales gains.
What Should You Be Worrying About?
There are many challenges facing food retailers today – among them eCommerce, hard discounters, and rising shopper expectations– but a price war started by Amazon’s purchase of Whole Food just isn’t one them.
No comments:
Post a Comment