Amazon (AMZN) is set to leverage its global e-commerce footprint tied to its grocery chain acquisition of Wholefoods Market in the coming days.
What has changed is the usage of prime subscriptions tied to the e-commerce business to give customers of Wholefoods a discount at checkout. On first impression the entry into the grocery segment has been a bit of a rocky one, but it did lead to some revenue and earnings accretion in the past year.
Now, we see Amazon unfolding the rest of its strategy tied to the Wholefoods acquisition with what could be a major shift in grocery market share in the coming years. Prime subscribers can anticipate a 20% price reduction on various food items from WFM, and with that reduction we’ll see a divergence in pricing trends unlike what we’ve witnessed in the past couple years.
Source: Morgan Stanley
The average basket of goods pricing has remained relatively stable, according to Morgan Stanley, but with the introduction of Prime Discount for 300 items, according to various media reports, we can anticipate that the basket price will trend considerably lower to perhaps $170-$180 based on recent data. The drop in pricing would make Amazon hyper competitive with competing grocers like Kroger (KR) and Wal-Mart (WMT), who continue to bleed market share in virtually every category, anyway.
Keep in mind, Amazon has around 100 million Prime subscriber currently, and the introduction of this added perk could increase demand for Prime subscriptions. Prime Subscription are starting to become a catch-all feature tied to the Amazon ecosystem, and like a Costco Card, Amazon customers can expect the same sort of treatment when they buy groceries at its own in-house grocery chain. What this all leads to is premium food coming down in price, and with more consumers preferring organic foods, or foods that are sourced responsibly, the appeal this might have is somewhat unprecedented, but it does come at a great time for Amazon looking for ways to gain market share against its number 1. rival Wal-Mart.
Wal-Mart also isn’t known to source the same high-quality foods as Whole Foods Market, and with the prospective risk that Whole Foods is now pivoting to a Costco like business model with the world’s number 1. E-commerce Retailer to back-it-up, or fuel the expansion efforts, we should see more activity at Whole Foods Market stores in the coming weeks, if not the coming months. If anything, Amazon is starting to suck the oxygen out of the grocers, and within the next few-years business results at the competing grocery chains could start to tumble (similar to what we’ve seen in a number of other retail categories where Amazon extinguished competition with lower pricing at mass scale).
Amazon stock was relatively unresponsive to the announcement, but the added foot traffic tied to a brick-and-mortar experience, and also tied to its online e-commerce platform does create some much-needed synergies. Furthermore, Amazon is the type of company that would burn some cash just to take a stab at its rival, Wal-Mart in the brick-and-mortar segment.
Following the news, Wal-Mart shares promptly declined by 1% on the session, because it implies that more consumers (roughly a third of all U.S. consumers) will now get flooded with Amazon Prime related deals tied to Whole Foods Market, and with this transition, Amazon’s promotional efforts will sway the buying habits of consumers looking to save money, but still buy high quality produce.
The pivot towards groceries was meant to be a highly-technological leap, but instead it turned into another catch-all feature tied to Amazon’s membership subscription business. Maybe, Amazon doesn’t reinvent the brick-and-mortar experience, but then again, do they really have to? They have 100 million subscriptions that help subsidize the cost of groceries.
All in all, Alphabet is a Wall Street favorite, earning one of the best analyst consensus ratings in the market. TipRanks analytics exhibit AMZN as a Strong Buy. Out of 36 analysts polled by in the last 3 months, 35 are bullish on Amazon stock while only one remains sidelined. With a return potential of 17%, the stock’s consensus target price stands at $2,125.16. (See AMZN’s price targets and analyst ratings on TipRanks)
Disclosure: The author doesn’t own a position in AMZN or WMT.
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