Dive Brief:

• Whole Foods' main value is as a “pricing lab” for Amazon to hone its merchandising of specialty products across its physical and online retail ecosystem, consultant and author Hermann Simon writes in the Harvard Business Review. 
• Simon sees Amazon’s pricing and data strategy unfolding in three steps. First, the company will alter Whole Foods’ price perception by expanding its product discounts. In doing this, Amazon will broaden the market for healthy and natural foods. Finally, the e-tailer will apply its findings to its broader retail offerings, according to Simon. 
• “The real value of this deal for Amazon may not be in growing Whole Foods’ customer base, or even one day dominating the grocery category, but in what they learn from doing so,” writes Simon.

Dive Insight:

The fact that Amazon is lowering prices at Whole Foods is significant, but even more significant is what the online retailer is discounting, and how it's communicating these discounts, according to Simon.

First, Amazon is discounting products that embody Whole Foods’ premium, all-natural image — items like avocados, apples, sustainably harvested salmon and pasta sauce. Second, the e-tailer is conveying these discounts in a very clever way. Targeted products come with an orange co-branded sign showing the previous price followed by the new price, and a message that there’s “more to come.”

“The 'more to come' is a clever invitation for customers to remain on the lookout either for further price cuts or for cuts on other items,” writes Simon. “This step goes hand in hand with the media attention these price changes drew. That publicity is not an accidental by-product of Amazon’s efforts.”

These sophisticated discounts gave Amazon a 25% traffic bump in its first two days, according to data from Foursquare Labs, and should continue to drive traffic as they expand. But most important, Simon writes, is the window these discounts give Amazon into how people buy specialty products, and how they respond to price promotions.

This is what many have speculated was the real reason behind Amazon’s acquisition: data. Whole Foods gives Amazon a sizable physical grocery presence. But Amazon’s main goal is not just to dominate brick and mortar grocery — or even the broader grocery industry — but to use its findings from Whole Foods to improve its pricing and promotions in all the categories it covers.  

This may very well come to be. For now, though, grocery companies are more concerned about the impact Amazon will have on their industry. A big question right now is, will Amazon be able to overcome the limitations to online and physical growth unique to grocery? And will these limitations hold up over the long-term? The majority of consumers still prefer to shop in stores. A just-released study from the International Council of Shopping Centers found that 99% of consumers do some or all of their grocery shopping in stores. Online grocery shopping is increasing, but it’s facing stiffer headwinds to adoption than many expected, mostly thanks to shopper preference for buying fresh foods in-person.

On the brick-and-mortar side, the glut of grocery stores in the U.S. presents a challenge to Amazon’s growth. Rather than opening a flood of new Whole Foods locations, Amazon will likely be limited to a trickle. Of course, the company could always acquire more grocery chains. And the smaller, lower-overhead 365 by Whole Foods stores offer more flexibility in where it can site locations.

Amazon also faces significant resistance from strong grocery operators like Walmart, Aldi and Lidl. The e-tailer’s dominance is by no means guaranteed, but its considerable toolbox of physical, online and analytical resources coupled with ever-shifting consumer preferences make it a formidable foe in the grocery industry — and an even bigger threat across the broader retail landscape.