Today marked the first day Amazon took ownership of Whole Foods. Reports came out early this morning showing images of Amazon Echo’s and Echo Dots on prominent display for sale in stores. If there was any doubt Amazon was going to use their newly acquired real estate we can put that doubt to rest. As a reminder, Whole Foods is the most profitable grocery store per square foot and has the luxury of leveraging a highly profitable customer base. Which makes Amazon using this retail space an interesting topic of discussion.
The report also noted that Amazon was cutting the price of select items. It was these price cuts that got me thinking about some broader ambitions Amazon may have with Whole Foods. Typically, Whole Foods has catered to a more high-end customer base. Each store is strategically positioned in proximity to neighborhoods where the average income is $70,000 a year or higher. The question Amazon cutting prices of products in Whole Foods raises is if Amazon does indeed plan to mainstream Whole Foods Markets. By mainstreaming it, Amazon could open up their opportunity to an even broader base of customers by attracting a wider range of demographics to Whole Foods.
Of course, these price moves could simply be a way to ward off potential disruption from lower priced competition as an analysis of 5 prominent west coast Whole Foods locations found they were on average 13% more expensive than Ralph’s (Kroger) and Sprouts. Whatever strategy Amazon is after, the bottom line is attracting more customers to Whole Foods stores on a more frequent basis is a win for the company.
Another interesting element of this analysis is how Amazon can start converting parts of Whole Foods locations to logistics centers. A private hedge fund analysis I read stated that Amazon’s fulfillment centers are located in similar high-affluent areas with similar demographics to Whole Foods. The note stated:
Amazon’s current fulfillment and distribution footprint are also located in more affluent and higher density locations (with high aggregate income). For example, Amazon’s Delivery Stations, Pantry/Fresh Food DCs and Prime Now Hubs are located in areas with median household income of ~$63,500, ~$68,000 and ~$61,000 within a 60 min drive time, respectively.
The conclusion of this investor note was that the geospatial locations of Whole Foods and Amazon’s logistics centers were an exact match. Which makes a compelling case for more logistics to be worked into Whole Foods locations for a variety of things Amazon wants to offer. Converting parts of Whole Foods to logistics centers makes a great deal of sense. But the fresh opportunity is still as fresh as ever.
In another analyst note I read by UBS, they detailed locations where there was an overlap of Amazon Prime Now, Fresh and Whole Foods locations. As you can see, Whole Foods stores fill a massive gap in Amazon’s fresh grocery strategy.
The US Food Retail Market is a $1.1 billion dollar market by most market analyst estimates. Amazon’s share of this is minuscule to put it kindly. There is no doubt Amazon plans to bring their expertise in price, convenience, and selection to the table when it comes to Whole Foods and the Prime Now + Amazon Fresh opportunity.
Lastly, I continue to be convinced the idea I laid out in my first analysis of this move where Amazon offers a Blue Apron competitor is extremely likely. Amazon can offer professional chef and artisan recipes, combined with pre-packed recipe items, and offer that on a subscription or for a set fee to Prime customers using Whole Foods as a distribution center. Blue Apron has the right idea but does not own enough of the supply chain or distribution to succeed. Amazon is the most likely candidate to deliver on such a service.
Amazon is continually becoming so well positioned in many markets, US being the strongest now in my opinion, that they continue to be a force to be reckoned with. It seems like every month that goes by Amazon is becoming harder and harder for their competition to compete with.
