Why and How Amazon cut Whole Foods prices?
I’m pretty sure we all read headlines like “Amazon cuts Whole Food prices up to 43% in the first day” pop up in our news apps and feeds. If you haven’t to keep it short and simple Amazon acquires Whole Food, a grocery shop well known for its organic choices in the USA. As we all know, Amazon is a smart company and won’t just lower their profit margins for nothing, so why are they doing so?
Before we go deeper we first need to know how holes food works at its core. Wholes Food is a shop that is popular for its organic goods, well besides Amazon Echo! Organic products directly correlates higher prices resulting the shop to be portrayed as market for the wealthier. The prices don’t just increase because its pure attributes but also for how it reaches the shop. Everything you see has a huge network of people before it directly reaches the store.
Farmer →Supplier level 1 →Supplier level 2 →Supplier level 3 →Shop
With each arrow the prices increases because each dealer sells it for a higher cost than the one before him, to make his living, and the addition of tax and shipping makes the product incredibly higher than the original price offered by the farmer. And don’t forget, Whole Foods only deals with organic food.
Well, the solution might seem very obvious, buy it directly from the farmer. But its a lot more than what it sounds, buying right from the farmer isn’t that easy, especially when you have to scale larger. But with amazon’s expertise its possible, for the most part. This is possible since Amazon already has a huge strong network, shipping and buying can be done in a breeze. With this technique even if Amazon has a higher profit margin, the price will still be cheaper since its only being purchased once, the amount you and Amazon has to pay for tax reduce in a massive amount.
But Wait There is More…
Since its only been one day since Whole Foods joined the Amazon family, the products you see on the shelf are shipped using the old method. So when reducing the prices, Amazon is actually not making profit infact it could be a loss. But while looking at it with a more wider lens, Amazon is making more money then they are potentially loosing by immediately decreasing product prices, by advertisement. All the press going haywire on this reduction especially since its the first day.
So you could say, I’m paying Amazon!