Amazon has triggered a price war in the grocery business as it takes over Whole Foods

Amazon is repeating a strategy that has worked for them in the past to pummel their competition and the customer always wins. According to a report in the Wall Street Journal, former Amazon executive in charge of performance evaluation and policy enforcement, Chris McCabe stated, “Amazon’s using the same playbook they always have when competing with booksellers and other retailers.”

From the looks of things, Amazon wasted no time to send a message to the market about their intentions. Whole Food’s best sellers- ground beef, eggs and bananas – saw prices drop this week as Amazon took over. The online retailing behemoth dropped prices on the highest volume products at Whole Foods to generate sales away from the supermarket retailers. Amazon is expected to lose a lot of money in this strategy, but based on how they have attacked other markets, this is intentional. The point of lowering prices for consumers is to drive traffic and activity into their properties.

Whole Foods currently has 470 brick-and-mortar locations around the country and Amazon is expected to use those locations as a beach-head to expand into categories beyond groceries. The company is using the high-volume product categories to drive traffic into stores, to place pressure on Kroger and Wal-Mart, and to develop a greater level of loyalty among its Prime users that have been slow and reluctant to see Amazon as a viable grocery option.

For an industry with low margins, the food retail business requires high capital investments. Stores are expensive to maintain, staff, and keep up with changing consumer tastes and preferences. Plus, the very nature of grocery retail is that you must turn products very quickly to maintain freshness and food safety. Any volume of consumers that flock to Whole Foods to take advantage of the lower prices on highly desired meats and produce will certainly be felt. Additionally, the types of consumers that have occasionally shopped at Whole Foods for special selections are among the most profitable for the legacy stores. If those shoppers discontinue their loyalty to the other supermarkets and buy substantially all of their grocery products through Amazon, it will mean a large impact on the profits of the other supermarket brands.

Price tends to be the primary reason that consumers switch supermarkets, followed by selection of branded goods. Outside of a very dedicated group of consumers, Whole Food’s clients typically have maintained loyalty to another brand so they could buy branded goods. If Amazon were to bring these brands into Whole Foods stores, it might appeal to a much larger audience of consumers. Combine this with the data that Amazon has on consumers through Prime and you have the making of a death star for the other grocers.

The challenge to be successful in the supermarket space is huge- but Wall Street believes that Amazon will be successful. The announcement of Amazon’s acquisition of Whole Foods rocked the grocery sector enough for the entire sector to lose more than 20% of its collected market cap in 2017. In recent years, large legacy brands have struggled to keep American consumers interest in their brands as natural food retailers like Whole Foods have started to take a bigger slice of the pie- but they have been insulated from complete market pressure knowing that Whole Foods was reluctant to change its pricing or branding strategies.

Beating Amazon at its own ball game seemed like an exercise in futility. But Wal-Mart’s acquisition of e-commerce start-up Jet.com served as the retailer’s best foot forward in bring the retail competition online. Currently, only 1,100 of Walmart’s 4,600-strong supermarket network has been getting upgrades to face Amazon head-on, according to Wal-Mart spokesperson Randy Hargrove. One of the first things that Wal-Mart has started testing is same-day deliveries of grocery items made online.

Wal-Mart’s Vice President of Investor Relations, Steve Schmitt, chose to speak highly of Amazon with these competitor-based strategies when he spoke to the company’s shareholders. “Amazon is really good. We certainly have respect for them, and we have experience competing with Whole Foods.”

Target also took the brunt of the impact brought by the Amazon-Whole Foods’ acquisition deal, pushing the supermarket chain to get re-focused on its grocery enterprise, hiring talent with experience in the food-retailing industry with a renewed focus in increasing sales of food items sold.

Kroger seems to be the most exposed to Amazon among the major supermarket chains- and they know it. They are taking Amazon very seriously and are committed to compete against them on their home-turf. Kroger’s Chief Financial Officer Mike Sclotman was blunt enough to admit it in a recent interview with WSJ. “If we have to sell a can of corn for 40 cents, we’ll figure out a way to sell a can of corn for 40 cents.”

Kroger’s market-cap has dropped by 36% in terms of market value since Amazon’s announcement, representing over $7 billion in losses. The price cuts and pressure for higher capex are expected to start showing up in the September data and will be a drag on margins for the long-haul.

The impact to the freight markets is unknown, but Jeff Bezos’ obsession with market domination is well known. His love of supply-chain and logistics is also well known. If Amazon is successful in creating enough density in their freight networks, they will start to increase the viability of its linehaul network. Their purchased transportation budget is more than $7B, with an estimated $2B spent on truckload services alone. This has been growing in excess of 20% every single year and anyone that has been in the LTL or parcel business knows that the denser a freight network is, the easier it is to gain cost efficiencies. Also, through their Whole Foods footprint they have gained a fulfillment network in highly affluent urban areas. You can expect this to become the lifeline of their last-mile delivery network.