Date
25 September 2017
Traditional supermarket chains become more vulnerable to Amazon’s zero gross profit strategy as the tech giant makes its way into physical stores through its WFM acquisition. Photo: thestrreet.com
Traditional supermarket chains become more vulnerable to Amazon’s zero gross profit strategy as the tech giant makes its way into physical stores through its WFM acquisition. Photo: thestrreet.com

Traditional supermarkets under heavy pressure as WFM cuts prices

Two months ago, Amazon announced its acquisition of Whole Foods Market (WFM) for US$13.7 billion. Last Monday, the e-commerce giant officially took over nearly 500 WFM stores, and the first thing it did was slash the average price by about 15 percent.

WFM has been targeting high-end consumers, selling organic and fresh grocery at higher prices than other supermarket chains like Walmart and Costco.

However, after the price reduction, most of its food products are now cheaper than its rivals.

Walmart, like most of US large supermarket chains, maintains a 20 percent gross profit traditionally.

Costco adopts a slightly different business model.

Costco typically caps its gross margin at below 14 percent, but it charges charges a membership fee of US$55 to US$120 per year.

As of last year, Costco had more than 40 million members, which generated US$2.4 billion in membership fees.

In other words, by building customer loyalty through extra-low gross margin, Costco has been able to boost its membership base and generate a stable, sizable membership fees.

It also makes money from credit card lending and advertising. As a result, Costco has bucked the market trend and its share price posted a rally of over 60 percent over past five years.

But Walmart, Costco and other retailers will be now under bigger pressure following the WFM’s latest moves, because Amazon’s business model is based on zero gross profit margin.

Amazon does not aim to make money from selling products, but from other services, such as advertising, logistics and cloud services..

In addition to price reduction, Amazon has set up stalls in WFM shops to sell Kindle and Echo, and online shoppers will be allowed to pick up or return their purchase at all WFM outlets. It also added fresh food into online shopping and delivery category.

Amazon now has a market value of US$470 billion, twice that of Walmart and seven times of that of Costco. Also, it owns the world’s best offline-to-online technology.

Facing such a formidable rival, brick and mortar players do not seem to stand much of a chance.

Share prices of US supermarket chains plunged in June when Amazon announced the WFM deal. And these stocks suffered a heavy sell-off again on Monday.

This article appeared in the Hong Kong Economic Journal on Sep 1

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA

Hong Kong Economic Journal columnist

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