Friday, September 1, 2017

Reduce Prices When you Acquire a Complementary Good: Amazon/Whole Foods

The WSJ is reporting that Amazon will begin steep price cuts at its newly acquired Whole Foods affiliate. One way to think of the merger is that it couples Whole Foods's retailing niche with Amazon's logistics expertise. These are complementary assets. Lowering the margin on one increases the demand for the other. This is likely to be profitable for Amazon. Some evidence that this will benefit consumers can be gleaned from the effect of the announcement on traditional retailers.
The announcement Thursday, which sent stocks of traditional grocers into a fresh tailspin, said price changes for both staples and more high-end foods would go into effect as soon as Amazon closes the Whole Foods deal on Monday. 

2 comments:

  1. When you think of organic or natural food stores Whole Foods can be viewed as the organic giant in the market. Many people are not aware that Whole Foods has been around since the 1980’s and during this time there were not very many health food chains, which gave Whole Foods a huge advantage in expanding to new areas, due to Whole Foods being one of the only natural and organic food chains during this time. Nowadays people are more health conscious and there are many alternatives to Whole Foods such as Trader Joes, which can offer cheaper prices than Whole Foods. As we have learned “Consumers respond to a price increase by switching to their next-best alternative. If their next-best alternative is a very close substitute, then it doesn’t take much of a price increase to induce them to switch.” (Froeb, McCann, Shore & Ward, 2016) Speaking from my own personal experience I have only shopped at Whole Foods a few times and have shopped at Trader Joes several times due to the prices being much lower. Amazon has already started cutting prices since they are “determined to make healthy and organic foods affordable for everyone.” (Meyer, 2017) Amazon is known for offering low prices on products and has already doing this with Whole Foods and I believe they will be very successful in doing so with Whole Foods. One other thing that Amazon is working towards is tying in Amazon Prime memberships into the Whole Foods shopping experience, which again will give them an advantage over their competitors. Nearly half of U.S households have Amazon Prime and when having to decide between two different alternatives such as Whole Foods and Trader Joes, Amazon could look more appealing since consumers will receive special savings and in-store benefits. (Meyer, 2017) As mentioned I have only shopped at Whole Foods a few times, but with Amazon taking over I could see myself shopping there more often.


    References

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics a problem solving approach. Boston, MA: Cengage Learning

    Meyer, Zlati. “Amazon will begin lowering prices at Whole Foods - starting Monday.” USA Today, Gannett Satellite Information Network, 25 Aug. 2017, www.usatoday.com/story/money/2017/08/24/amazon-lower-prices-select-whole-foods-items-starting-monday/598282001/

    Owles, E. (2017, June 16). How Whole Foods Became the Organic Giant. Retrieved from https://www.nytimes.com/2017/06/16/business/dealbook/whole-foods-amazon-timeline.html


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  2. The announcement by Amazon that they were acquiring Whole Foods and that they would begin with deep prices cuts sent ripples through the traditional grocery stores. The strategy of staying ahead of forces that erode profit and gaining sustainable competitive advantage impacted the traditional grocery stores with stock price decreases and concerns about their market share. Firms with the competitive advantage can deliver the same product or service benefits as competitors but at a lower cost or they can deliver superior products at a similar cost (Froeb et al., 2016, p. 126). The acquisition takes advantage of Amazon’s expertise in logistics and Whole Foods quality is a good example of vertical integration and additional value in the supply chain for Whole Foods. Amazon can gain profitability from the food processing step rather than just being a food retailer. “Retail margins, especially in food retailing, are very low (supermarkets average only a 2% profit margin) so moving into higher margin businesses is good news for the long-run profitability of Amazon” (Dorfman, 2017).

    A tool that can be used is the Stay-Even Analysis to determine what volume is required to offset the reductions in price to determine how many sales Whole Foods can lose before the sales are unprofitable. Knowing when to change prices will help keep profitability from eroding.

    The company also said its Amazon Prime program, which analysts estimate has more than 60 million members, will become Whole Foods’s customer-rewards program and that new deals at the supermarket chain will be available through Prime (Stevens & Haddon, 2017). This kind of price discrimination will draw Amazon customers into the Whole Foods market furthering profitability for Amazon and Whole Foods.

    References

    Dorfman, J. (2017, August 25). Amazon and Whole Foods merger to introduce cross platform selling and lower prices. Forbes. Retrieved on December 12, 2017 from https://www.forbes.com/sites/jeffreydorfman/2017/08/25/amazon-and-whole-foods-merger-to-introduce-cross-platform-selling-and-lower-prices/#1107c0ec12f8.

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics: A problem solving approach. Boston, MA: Cengage Learning.

    Stevens, L. & Haddon, H. (2017, August 24). Amazon clobbers grocers’ stocks with price cuts at Whole foods. Wall Street Journal. Retrieved on December 12, 2017 from https://www.wsj.com/articles/whole-foods-to-cut-prices-on-some-items-1503601404.

    Ward, M. (2017, September 1). Reduce prices when you acquire a complementary good: Amazon/Whole Foods. Retrieved on December 12, 2017 from https://managerialecon.blogspot.com/2017/09/reduce-prices-when-you-acquire.html#comment-form.

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