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Blurring the Lines

Amazon’s impact and what it means for the produce industry
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The company could also be looking at food as a loss leader. “The food business drives frequency of shopping, and purchasing of fresh is even more frequent,” Peterson reports.

If so, that strategy is likely to have a great impact on the grocery industry. “The reason Amazon is a competitor to be feared is because Amazon doesn’t have to make a nickel on produce,” McLaughlin explains. “It only wants groceries to drive business to its websites and drive sales of other products that have better margins.”

If this is true, predictions that Amazon would purchase Target and its vast network of stores in the United States would add a new dimension to the stores vs. online bonfire.

Pricing, Margins, and Survival
When Amazon bought Whole Foods, the latter’s association with high quality perishables was accompanied by a reputation for very high prices. Immediately upon closing the acquisition in August, Amazon announced it would discount a number of popular, high-volume items.

Among the price-chopped were organic and conventional bananas, as well as organic avocados, baby kale, baby lettuce, Gala and Fuji apples, broccoli, salad mixes, and russet and sweet potatoes. Prices came down from 30 percent to almost 50 percent in some cases.

“People said it wasn’t a big deal, but everyone else lowered their prices, too,” Peterson says. “Price matters; consumers will look for what they want at the price they want.”

The price cuts had an immediate impact, causing six large food retailers (including Walmart and Kroger) to collectively lose $12 billion in stock value within 24 hours. This followed a $22 billion stock drop among leading grocery retailers on the day the Amazon-Whole Foods deal was first announced in June 2017.

Conversely, Whole Foods’ share of the U.S. grocery market rose by 16 percent in the week following the price cuts, according to inMarket, and store traffic increased 25 percent in the first two days, according to Foursquare.

Data from research firm Thasos showed customers from many stores, including Trader Joe’s, Sprouts, Target, Costco, Safeway, Kroger, and Walmart shopped at Whole Foods after the price reductions. By October, however, many of the prices had reverted to pre-merger levels—though additional, limited rounds of price cuts continue.

Price wars
“Amazon has the ability and the strategic capability to drive prices to the lowest level,” says McLaughlin.

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