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June 14th, 2018

When Amazon announced a year ago Saturday that it was buying Whole Foods Market, entering the brick and mortar retail industry it had long been destroying, the reaction across the sector was largely consistent: Amazon would dramatically transform the organic grocery chain and take over the industry.

The assumptions made sense. Years of Amazon’s dominance within e-commerce has made it an intimidating force.

In the time since the merger, Amazon has, in fact, been transformative in some ways.

Several of Whole Foods’ operational systems — including pricing, customer rewards and delivery — have been altered. Processes with Whole Foods suppliers have changed, giving way to more aggressive strategies to better compete within an industry that has reacted since the merger with its own e-commerce partnerships and technology investments.

But while changes have happened, they have not been as dramatic or fast-moving as some predicted.

So far, the customer experience at a Whole Foods store doesn’t look strikingly different than it did before the Amazon deal.

And Amazon still has ways to go to take over the industry.

“People had unrealistic expectations,” said Sucharita Kodali, an e-commerce analyst at Forrester Research. “It’s hard to scale online grocery.

“Nobody has figured out the economics of it.”

‘More watered down’

Just a year ago, before the deal with Amazon was announced, things looked very different for Whole Foods.

For years, the company’s grip on the organic grocery industry had weakened as competitors began to offer organic options at often times cheaper prices. Whole Foods continued to see its same-store sales fall, and investors were calling for change.

When Amazon unexpectedly entered the picture, striking a $13.7 billion deal to take over Whole Foods, the buyout was seen by some industry experts as a way for Amazon to acquire a horde of physical property (480-plus stores), which some analysts said would be important for Amazon to scale its grocery ambitions, or even distribution goals.

For Whole Foods, the merger was mostly welcomed as a positive move that would give grumpy investors a decent payday and the struggling chain a partner with seemingly endless resources. (Amazon has a market cap of about $800 billion).

Immediately, the prospects of a utopian grocery system seemed more attainable than ever. Industry experts began to speculate on how fast and how wide Amazon’s control of the industry would go.

Meanwhile, some of Whole Foods’ customers, who for years had relished the company’s independent foodie identity, were unsettled by the news.

“Amazon is so big that I thought that they might just private label everything and make it more watered down,” said Rebecca Forchione, a 39-year-old preschool teacher in Austin who regularly shops at Whole Foods. “I didn’t want Amazon to take away the culture, or for the food items to suffer.”

Ricardo Brazziell/Austin American-StatesmanWhole Foods customer Rebecca Forchione puts items in her car after shopping at Whole Foods on Friday, June 8, 2018.

Pushing to the mothership

In e-commerce, Amazon has dominated because of its highly competitive prices.

So it was fitting that one of the company’s first moves at Whole Foods, and the one that caught the most attention, was on brand.

Upon the closing of the buyout in August, Amazon immediately lowered prices on Hass avocados, Coho salmon and other popular items at Whole Foods and has continued to rotate price cuts on products since, although various analyses have shown overall prices haven’t significantly fallen. In late February, for example, an American-Statesman price check of a 25-item basket at Whole Foods showed only a 6 percent drop since a check of the same basket right before the merger closed.

Amazon hasn’t stopped there. A month ago, the company opened up its Amazon Prime world to Whole Foods shoppers, beginning a discount program that gives Prime members a 10 percent discount on items already on sale at Whole Foods.

In connection with those discounts, Whole Foods also rolled out two-hour delivery through its Prime Now system in select cities that included Austin.

“They’re pushing more customers into the Amazon mothership,” said Kodali, the Forrester Research analyst. “It’s one of the cheapest ways to get additional Prime members.”

Before its deal with Amazon, Whole Foods had started taking steps to centralize its supplier buying procedures, making vendors more regularly have to pass through Whole Foods’ headquarters in Austin. While Whole Foods has said the new process has made the company more efficient, some suppliers have said that it has become more difficult for smaller, locally-based vendors — the kind that Whole Foods has built its brand on — to scale up.

In addition, the company’s largest suppliers have had to pay new fees, and merchants now often have to cut their prices by at least 25 percent to be promoted nationally.

‘A higher price point’

Due to Amazon’s size and recognition, almost every change that happens at Whole Foods is noticed.

Industry analysts, however, say the merged companies still have a long way to go to make a big dent within the grocery industry.

Prior to their merger, Whole Foods and Amazon, through its Amazon Fresh grocery division, combined to control less than 2 percent of the grocery market, and Whole Foods still has many fewer stores than chains such as Walmart or Kroger.

The business of grocery delivery is difficult and costly, experts say, with obstacles such as refrigeration and consumer pickiness standing in the way. Whole Foods is also still a chain with a niche following - with average household income for Whole Foods customers being more than $75,000, according to analytics firm Thasos Group, which tracks location data from phones and used Census figures to calculate average income.

Amazon has struggled to erase Whole Foods’ longtime “Whole Paycheck” image. Even with the recent price cuts, customers say Whole Foods remains too costly.

“Any change that they’ve made since the acquisition to pricing hasn’t really pierced my conscientiousness enough to pay attention to it,” said Ashley Behnke, a Whole Foods shopper in the Austin area. “Price is always something my household pays attention to because we have two small children that go through a lot of food. Purchasing at Whole Foods has remained a higher price point than at other stores.”

To this point, products at Whole Foods have mostly remained the same, and movement toward a tech-dominated Whole Foods has happened incrementally.

Sebastian Herrera/Austin American-StatesmanAn Amazon Prime sign outside of a Whole Foods store in Southwest Austin.

‘Another step in the process’

During the year since their merger was announced, Amazon and Whole Foods’ competitors have not been idle.

Big box stores have struck deals with delivery companies, with Target buying grocery delivery startup Shipt in December and H-E-B acquiring Austin-based food delivery company Favor in February. At Walmart, the country’s largest private employer, grocery delivery service has been expanded to more cities. Prior to Amazon’s deal with Whole Foods, Walmart also bought bulk e-commerce retailer Jet for $3.3 billion.

Meanwhile, grocery delivery pioneer Instacart has been adding major retailers to its lineup, and since the beginning of 2017, has expanded from 30 U.S. markets to 240.

In some ways, Whole Foods has even been behind the curve.

While a curbside pickup option has yet to be offered at Whole Foods, both Walmart and H-E-B have long had the service and continue to expand it.

Additionally, Walmart has reportedly been testing robots for its inventory process, while Alibaba, a premier e-commerce company in China, has opened a number of automated, cashierless grocery stores.

“Whole Foods is another step in the process (for Amazon), but it doesn’t get them from A to Z to be a major player for food,” said Charles O’Shea, lead retail analyst at Moody’s Investors service. “Whole Foods didn’t have the financial flexibility before Amazon. They didn’t have the money that a Walmart has, or a Target has. Now, they have as deep pockets as anybody out there, so they will be able to catch up.”

Foot traffic at Whole Foods stores has increased by a range of 1 percent to 3.5 percent year-over-year in every quarter since the company closed its deal with Amazon, the analytics firm Thasos Group reported, with customers from Trader Joe’s, Sprouts Farmers Market, Kroger and Walmart being the ones most frequently defecting to Whole Foods.

United Natural Foods, one of Whole Foods’ biggest suppliers, also said its business to the grocer rose 24.3 percent to $992 million in sales during its latest quarterly earnings when compared to the same quarter a year ago, before the Amazon merger.

Whole Foods also has loyal customers on its side.

Luis Guido, a 42-year-old business professional in Austin who said he shops at Whole Foods every week and regularly picks up lunch there, said he trusts Amazon to scale Whole Foods in the most efficient way.

The online retailer’s relationship with Whole Foods, Guido said, still has a lot of room to grow. He said he thinks for Amazon to get it right, the company has to be methodical.

“There’s probably a lot of innovation going on behind the scenes,” Guido said. “For me, that’s OK, because I want for them to get it right.

“It takes time, and I’m willing to wait for it.”

Top photo: Whole Foods customer Rebecca Forchione walks toward her car after shopping at Whole Foods on Friday, June 8, 2018. Photo by Ricardo Brazziell/Austin American-Statesman

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