One year after Amazon (AMZN, Financial)'s purchase of Whole Foods stores for $1.3 billion, the largest group of beneficiaries of the deal to date might be Amazon’s own Prime members. Signs in Whole Foods stores point to special deals, offered for the moment, only to its Prime subscribers. Other discounts are available to Amazon’s Prime customers for select items such as fresh fruit and select meats.The preferential treatment is reflected in the fact that half of the stores now offer a 10% discount on sale items to Prime members.
Amazon is using its Whole Foods subsidiary as a vehicle for increasing its $119 annual Prime membership. Indeed, outside some Whole Foods stores, Amazon employees aggressively solicit new memberships.
In addition, Amazon has introduced free two-hour grocery delivery service for Prime subscribers in 14 cities nationwide, including Boston, Richmond, Virginia and Baltimore. The company hopes that over time, the convenient service will help draw new customers to its stores as well as increase its already robust Prime membership.
With Whole Foods, Amazon is trying to use the synergy from its other business units to help grow revenue from its Whole Foods operations. There is no doubt that Amazon’s data warehousing capabilities will be used to store information on customers food preferences as well as other valuable data to determine which of its companion services and other Amazon products offered in-store are profitable. Amazon previously leveraged its enormous database capabilities from its enormously successful and highly profitable AWS cloud services business as a vehicle to enhance its entry into the retail market.
The company is now hoping to leverage the benefits afforded its Prime Members as a way to draw more customers to its Whole Food stores. The vast numbers of its existing Prime membership customers could, over time, provide the company with an enormous pool of highly likely future customers. There are few other corporations who enjoy the tremendous advantages of an enormous captive customer pool, whose credit cards are already on file, making purchases across Amazon’s entire product and service offerings painless for the customer and enormously profitable for Amazon.
Although it is too early to tell the level of success of the endeavor (Amazon purchased Whole Foods one year ago) will have, the company has achieved success by using this strategy in its other core businesses. But this strategic plan took time to ultimately bear fruit.
Operating margins in the grocery business are notoriously thin; increased competition from Amazon by way of regional grocers losing some of their long-term customer base could prove difficult to absorb long term. Whole Foods, by comparison, enjoys relatively higher margins, but whether this will enhance overall store revenue remains to be seen.
Amazon has aggressively lowered prices at its Whole Foods stores due to its desire to broaden the store’s customer base which, prior to the merger, was limited to a relatively small base of loyal shoppers who didn’t mind paying high prices for natural food offerings. The problem for Whole Foods is that its pricing structure acted as a disincentive for other chain store grocery customers to shop at Whole Foods. The company’s reputation as a high-price, high-end grocer became ingrained over the years, with the effect of capping its total shopper base.
The placement of other Amazon products, such as Echo speakers and Fire tablets, in the store is additional evidence that the company plans to use its presence in the grocery business as a means of extending the reach of its other products.Ă‚ It is offering these to shoppers directly when they are doing what all must do: buy food.
It is too early to predict what effect the new policies will have on Whole Foods' bottom line. For now, the numbers are somewhat mixed: Discounts appear to be driving traffic, but sales per customer are down by an average of 1%, according to data firm Second Measure. By comparison, one-year sales have increased approximately 3% since Amazon’s acquisition.
Those who think these numbers are unimpressive should note that Amazon’s retail unit operated at a loss for a number of years while it aggressively expanded. The high margins of the cloud services division allowed Amazon to pursue its retail strategy as a loss leader. With each passing year, Amazon’s retail presence grows more pronounced. Ultimately, the Whole Foods purchase may follow a similar path.
I have no position in any of the securities referenced in this article.
