MORGAN STANLEY: Amazon could 'close the gap' between Whole Foods and its competitors' cheaper prices


Amazon Whole Foods Echo

(AP Photo/Joseph Pisani

Amazon's Echo and Echo Dot appear on sale at a Whole Foods Market in New York.

Whole Foods Market, the natural grocer founded by John Mackey in Austin, Texas 37 years ago, officially became part of Amazon's online retail empire Monday.


Amazon began slashing prices almost immediately, lowering the cost of various items from salmon and ground beef to avocados and organic kale.

Morgan Stanley analyst Brian Nowak sees lower prices as a way for Whole Foods to attract new customers, increase sales, and ultimately raise Amazon's stock to even higher levels than the 26% climb so far this year.

"We believe there is room for pricing-driven share gains given our latest AlphaWise survey shows that 70% of people who don't shop at WFM list price as the main barrier," Nowak wrote in a note to Morgan Stanley clients on the eve of the merger.

"Our Grocery team's survey work shows that WFM's average prices are ~14% higher than the average grocery store. We see lower pricing leading to accelerating WFM share gains.


Here's how Whole Foods prices compare to national averages, as well as to competitors Kroger and Sprouts Farmers Market:

Whole Foods prices vs. competition

Morgan Stanley

Lower prices could entice shoppers who had previously avoided Whole Foods, says Morgan Stanley.

"In essence, we believe WFM prices are 5% higher than competitors (excluding Proteins) and think AMZN has the ability to close that gap," writes the bank.

Cheaper options top the list of reasons shoppers avoid the chain, followed by convenience and better selection elsewhere. Here's a full breakdown:

reasons people don't shop at Whole Foods

Morgan Stanley


The bank also sees delivery and online ordering as another way for Amazon to harness Whole Foods as a driver of growth.

"Just as AMZN pushed expectations from a week delivery time (13 years ago) to 2 days (with Prime, introduced in 2005), a more robust Prime Now could further move the goal-posts to 2 hours. This will only further AMZN's competitive offering vs other retailers," writes the bank.

After the merger, Morgan Stanley maintains its overweight rating on Amazon's stock. The bank's price target of $1,150 is roughly 21% above where Amazon shares were trading mid-morning in New York.