We recently wrote about the Amazon and Whole Foods merger with a piece titled, Is Amazon.com’s Deep Dive Into Grocery And The Whole Foods Brand Worth $13.7 Billion? Any Significant Investment In Bricks And Mortar Would Torpedo Amazon.com’s Coveted PE Ratio.

Now, Amazon has completed its acquisition of Whole Foods, and, showing it to be an expert at manipulating the media, the company made an announcement that meant almost nothing but got the headlines it wanted:

From Bloomberg: No More Whole Paychecks, Amazon Promises… From The Washington Post: The Days of “Whole Paycheck” are Over… From Advertising Age: Amazon Has a Plan to Shed Whole Foods’ ‘Whole Paycheck’ Image

Yet the Amazon/Whole Foods release was both highly specific and oddly irrelevant. It did, however, promise price cuts on a litany of items:

Starting Monday, Whole Foods Market will offer lower prices on a selection of best-selling staples across its stores, with much more to come. Customers will enjoy lower prices on products like Whole Trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85 percent lean ground beef, creamy and crunchy almond butter, organic Gala and Fuji apples, organic rotisserie chicken, 365 Everyday Value organic butter, and much more.

This was enough to send grocery stocks crashing as investors worried about a grocery price war. The Wall Street Journal titled its piece, Amazon Clobbers’ Grocers Stocks with Price Cuts at Whole Foods.

Stocks for six large food retailers, including Kroger Co. and Wal-Mart Stores Inc., lost around $12 billion in value after the announcement. Shares of grocery-store companies had already been battered since the deal was announced in June, and analysts say they expect grocery stocks could fall further.

But there are three things to note about Amazon’s announcement:

First, it did not say it would lower prices on high-volume staples. It promised to lower prices on organic or “Whole Trade” products — these account for only a tiny fraction of the market.

Second, it didn’t say how large the price reductions will be.

Third, and most important, the release said zero about any intentions to accept overall lower margins. Whole Foods’ most recent gross margins have been around 34 percent. Its net profit margin was around 2.85 percent.

Which brings up the dirty little secret of retail pricing, much of which is about creating the perception of low prices rather than actually offering low prices. This manifests itself in different ways. Wal-Mart calls it the “Opening Price Point” — one alluring, hopefully unmatchable item in each category to draw consumers in and create a kind of “halo effect,” making consumers feel the whole category is priced well. But, to the extent the “Opening Price Point” item is based on Wal-Mart taking a lower margin, it causes the costs of other items to increase because it does not affect the overall margin requirements.

In an age in which the media is always being accused of presenting “fake news,” the gullible way that virtually the entire media just regurgitated the Amazon/Whole Foods release is incredibly disappointing.

And, in fact, when Amazon completed the takeover of Whole Foods, it counted on the generally lazy media to report what was easy to report — that on these few items, Whole Foods had substantial price reductions. It didn’t take long for Bloomberg to do a price check on the individual items before and after the announcement and announce, Amazon Cuts Whole Foods Prices as Much as 43 percent on First Day

In other words, like dogs following their master, the media dutifully did the PR job of trumpeting the Whole Foods list of items it would cut prices on. But surely this is the most unimportant news in history. Who cares if a particular store lowers the price on a particular item? That is usually not news at all — that is what stores usually tout in their weekly ads.

Clearly the only thing that is relevant is whether Amazon has made a decision to accept lower gross margins on the overall store basket. If Amazon announced that Whole Foods will drop its retail gross margin to 15 percent instead of its current 34 percent, now that would be news!

Announcing a price cut on one item means nothing. Maybe Whole Foods would fund price cuts on Organic Gala Apples by increasing prices on Clementines. The failure to ask these questions is a disgrace for the media.

A few news outlets avoided the hype and pointed out the obvious truth. Credit goes to CNBC on this one: Whole Foods overall prices still high after selective cuts: Analyst

Here is the money quote:

“Amazon appears to be taking a page out of the old Wal-Mart playbook on the price action front that is, announcing a plethora of price actions that on the surface look deep, but in reality only reveal modest reductions,” Gordon Haskett Research Advisors analyst Charles Grom wrote in a client note.

“We will continue to monitor the situation going forward, but our initial checks suggest that Amazon’s bark may be greater than its bite,” wrote Grom.

Whole Foods stores around the country on Monday cut prices on selected items by as much as 43 percent. The move, on the day Amazon closed its $13.7 billion acquisition of Whole Foods, was broadly cheered by shoppers.

But Grom said an analysis of prices on more than 100 products at a Whole Foods in Princeton, NJ, showed an average price decline of only 1.2 percent between Aug. 21 and Aug. 28th, dates that fell before and after the merger. Prices on about 78 percent of items were unchanged from the previous week, said Grom.

Among individual items, the price on a 16-ounce tub of Talenti Gelato fell to $3.49 from $5.79, or almost 40 percent, while the price on a 6-ounce box of Annie’s Mac and Cheese more than doubled, going from $1 to $2.19.

So, Annie’s Mac and Cheese more than doubles in price, and there is scarcely a mention. Whole Trade organic bananas drop 30 percent, and it is highlighted in thousands of media reports. Why? Because Amazon/Whole Foods sent a press release about one item, but the other price increase would require the media to actually do work to discover it.

Some publications have come up with elaborate theories on why Amazon won’t need to make money on groceries. This echoes the same point grocers feared about Wal-Mart when it began its move into supercenters. After all, Wal-Mart was pairing its high-margin general merchandise operation with a low-margin food business. The goal was to capture customers more frequently and have them buy a toy or towel while picking up some regularly shopped items such as milk, bread and fresh produce.

But it turned out that the issue of whether companies need to “make money” on groceries is a bit beside the point.

First, food is such a big retail category that it overwhelms everything else. Very quickly, grocery became the majority of Wal-Mart’s business. It is hard to not make money on the majority of your business and then make it up on the rest.

Second, the issue is really not whether Amazon needs to “make money” on Whole Foods – it is whether, and if, it is prepared to lose money on Whole Foods. The entire net margin for Whole Foods is about 2.85 percent, so, if Amazon wants, it can lower prices across the board by about 2.85 percent and break even.

Unless Amazon has a way to buy cheaper or reduce the operating costs of the Whole Foods stores, it cannot significantly lower prices without losing money.