New lower prices at Whole Foods Market may not dispel the natural grocery chain’s “whole paycheck” reputation, but it could build stronger relationships with owner Amazon.com Inc.’s Prime members, much like Costco Wholesale Corp. has with its loyal repeat customers.
On Wednesday, Whole Foods lowered prices on hundreds of items including organic rainbow chard and mixed-medley cherry tomatoes.
The grocer, which was acquired by Amazon in August 2017, said Prime members can expect more than 300 exclusive deals over the next few months in addition to 10% off of sale items.
There are more than 100 million Prime members.
“It looks like the strategy is to create a Costco-like relationship by providing another benefit rather than putting a dent in the ‘whole paycheck’ reputation,” said Kathy Gersch, executive vice president at Kotter, a strategy execution and change management firm.
Gersch sums up the Costco strategy as one that builds connections with members, which increases purchasing.
“Same with Amazon,” she said. “There’s a continued strategy of driving up Prime membership by creating more perks whether that’s video, shipping benefits, [etc.] The more benefits, the larger the share of wallet.”
Costco has an average overweight analyst rating and average price target of $243.42, according to 29 analysts surveyed by FactSet.
“While Costco isn’t the fanciest retailer, it’s among the most effective,” wrote UBS analysts in a March 8 note. “Its top notch merchandising and transparent pricing structure have helped it secure greater wallet share from its existing members and also attract new ones. Over time, it’s able to build greater buying power and pass along the savings to its members.”
In the second quarter, Costco reported a 90.7% subscription renewal rate in the U.S. and Canada, up from 90.5% the previous quarter.
“With Costco’s membership renewal rates ticking up once again in 2Q, it’s clear that its members are buying into its value proposition.”
UBS rates Costco shares buy with a $270 price target.
The heightened competition between the biggest names in retail, which also includes Walmart Inc. and Target Corp., pushes all of the major players to offer exclusives, private labels and perks to drive traffic and sales.
Amazon has been focused on grocery for growth, according to KeyBanc Capital Markets.
“Whole Foods reduced prices roughly 20% on 500 SKUs [stock-keeping units], helping to close the competitive gap between Whole Foods and higher-end competitors,” analysts led by Ed Yruma wrote in a note. “While grocery has structurally lower margins than other categories in retail, its high purchase frequency and total dollar spend makes it an important area of focus for Amazon.”
KeyBanc thinks Amazon will ultimately add a mid-market grocery to add share.
KeyBanc upgraded Amazon to overweight with a $2,100 price target in a March 14 note.