We recently wrote about the Amazon and Whole Foods merger with a piece titled, Is Amazon.com’s Deep Dive Into Grocery And The Whole Foods Brand Worth $13.7 Billion? Any Significant Investment In Bricks And Mortar Would Torpedo Amazon.com’s Coveted PE Ratio.
Now Amazon has completed its acquisition of Whole Foods, and, showing itself to be an expert at manipulating the media, the company made an announcement that meant almost nothing but got the headlines it wanted:
From Bloomberg: No More Whole Paychecks, Amazon Promises
From The Washington Post: The days of “Whole Paycheck” are over.
From AdvertisingAge: Amazon Has a Plan to Shed Whole Foods’ ‘Whole Paycheck’ Image
Yet the Amazon/Whole Foods release was both highly specific and oddly irrelevant. They did promise price cuts on a litany of items:
Starting Monday, Whole Foods Market will offer lower prices on a selection of best-selling staples across its stores, with much more to come. Customers will enjoy lower prices on products like 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, 365 Everyday Value organic butter, and much more.
This was enough to send grocery stocks crashing as investors worried about a grocery price war. The Wall Street Journal titled its piece, Amazon Clobbers’ Grocers Stocks with Price Cuts at Whole Foods
Stocks for six large food retailers, including Kroger Co. and Wal-Mart Stores Inc., (WMT) lost around $12 billion in value after the announcement. Shares of grocery-store companies had already been battered since the deal was announced in June, and analysts say they expect grocery stocks could fall further.
But there are three things to note about amazon’s announcement:
First, it did not say it would lower prices on high-volume staples. It promised to lower prices on organic or “Whole Trade” products — these account for only a tiny fraction of the market.
Second, it didn’t say how large the price reductions will be.
Third, and most important, the release said zero about any intentions to accept overall lower margins. Whole Foods’ most recent gross margins have been around 34%. Its net profit margin was around 2.85%.
Which brings up the dirty little secret of retail pricing, much of which is about creating the perception of low prices rather than actually offering low prices. This manifests itself in different ways. Wal-Mart calls it the “Opening Price Point” — one alluring, hopefully unmatchable item in each category to draw consumers in and create a kind of “halo effect,” making consumers feel the whole category is priced well. But, to the extent the “Opening Price Point” item is priced based on Wal-Mart taking lower margin, it causes the prices of other items in the department to rise because it does not change Wal-Mart’s overall margin requirements.
All over the country, vendors of so-called “wet salads” sell potato salad, macaroni salad and coleslaw to retailers at a loss — but they make up the margin by charging more on smaller volume salads.
In an age in which the media is always being accused of presenting “fake news,” the gullible way that virtually the entire media just regurgitated the Amazon/Whole Foods release is incredibly disappointing.
And, in fact, when Amazon completed the takeover of Whole Foods, it counted on the generally lazy media to report what was easy to report — that on these few items, Whole Foods had substantial price reductions: