PULLMAN, Wash. — Amazon maybe heading for a food price war with its acquisition of Whole Foods, and initial cuts have targeted the organic produce sector that’s becoming more important to the Washington tree fruit industry, an industry expert says.
Seattle-based online giant Amazon closed a $13.7 billion deal Aug. 28 to buy Austin, Texas-based Whole Foods Market Inc. and the same day cut prices of bananas 38 percent, organic baby kale 12 percent and tilapia 33 percent. In a news release, Amazon said its vision is to make “Whole Foods Market’s high-quality, natural and organic food affordable for everyone.”
“The big problem for competitors is Amazon doesn’t appear to be worried about debt. It’s stock is $1,000 a share and keeps rising and as long as it does they can borrow from all sorts of markets,” said Desmond O’Rourke, retired Washington State University agricultural economist and world apple analyst in Pullman.
What items Whole Foods carries is being decided centrally instead of locally and brand representatives no longer may promote products or check displays in-store, the Wall Street Journal has reported.
Brooke Buchanan, a Whole Foods spokeswoman, had no comment on whether there will be price wars. She said Whole Foods will continue to discover and sell local products while selecting the best national products possible.
“This improves the customer experience and also ensures local supplier are represented in categories where they will be successful and positioned for growth,” Buchanan said.
With 460 Whole Foods stores, Amazon is estimated to be the fifth-largest grocery retailer in the country behind Walmart, Kroger, Costco and Albertsons, according to Cowen financial analysts.
“What worries the retail food industry is that Whole Foods will indiscriminately cut prices and companies like Walmart and Kroger will have to borrow the money or generate it from their own sales to cut prices,” O’Rourke said.
They’re not growing as fast and can’t borrow as much, he said.
Retailers will pressure suppliers such as tree fruit companies for lower prices but suppliers can only go so low given production costs, especially with organics, he said.
“I think retailers are very concerned. They are poised to compete at the retail level. Markets will settle where markets settle,” said Tom Riggan, general manager of Chelan Fresh Marketing in Chelan.
“The question is whether Whole Foods is willing to lower its overall margin. Any retailer will put pressure on suppliers to be as low as they can, but they have to keep supply and quality so it’s a fine balance,” Riggan said.
Bob Mast, president of Columbia Marketing International in Wenatchee, said Whole Foods has a “deep thinking group” that understands consumers.
“When Amazon speaks the world listens right now. They are a powerhouse. The day they made the purchase stocks of big retailers took a big dip,” Mast said.
Whole Foods is “aggressively” pricing fresh crop organic Gala apples at $1.49 per pound and other apples at $1.99 versus $2.49 to $2.79 every day pricing at this time last year, he said.
Whole Foods is “aggressively challenging” suppliers on price and appears to be passing the savings on to consumers, he said.
“We’re obviously concerned because on organics you have to have a premium over conventional because of cost of production,” Mast said.
Organic fruit costs more to grow and yields are lower, he said. Fruit is smaller and each drop in size equates to a 10 percent loss in volume of packed fruit, he said.
Organic fruit is also more perishable and doesn’t store as well as conventional fruit so its sales season is shorter, O’Rourke said.
Yet large Washington tree fruit companies — including Zirkle-Rainier, Domex Superfresh Growers and Stemilt Growers — are moving heavily into organics, O’Rourke said.
This fall’s Washington apple crop is forecast at 130.9 million, 40-pound boxes, and 13 million of that, close to 10 percent, is organic, Mast said. That’s up 20.8 percent from last year, he said.
Stemilt announced Sept. 21 that 30 percent of its apples this year will be organic and that it will continue the three-year process of converting more acreage from conventional to organic.
Despite higher costs and risks, companies are moving to organics because they and managed varieties are the two largest areas of growth with consumers, Mast said.
Kroger and Walmart are positioned well to compete and tree fruit companies are concerned a spread of lower pricing on organics could hurt their viability, he said.
O’Rourke said it may take two to five years to play out and that the situation may not be as threatening as other retailers perceive.
“I think Amazon is taking a huge gamble moving into the retail food business because it’s not familiar with it and it’s completely dispersed from the business model they run now,” O’Rourke said.
Amazon sells products online and ships them from large distribution centers where they have tight control of operations, he said. There are more operational variables with greater human factors in retail stores that companies like Kroger have had 100 years to master, he said.
Another danger for Amazon and Whole Foods is alienating its core consumers, who prefer to pay more for superior product, O’Rourke said.
But the key thing, he said, is the cost of organic production. Walmart tried to go heavily into making organics more affordable and it didn’t work, they lost supply, he said.