Cheap baby kale? Tick. Low prices for organic salmon? Tick. Collecting your online shopping deliveries while shopping for groceries? Tick. E-commerce behemoth Amazon.com, Inc. (AMZN) announced a raft of post-acquisition changes at Whole Foods Market, Inc. (WFM) last week. The changes are expected to benefit customers of both companies. They will also benefit Amazon in three ways.
First, the reduction in prices should broaden the customer base for Whole Foods. Even as it has grown in size over the years, Whole Foods has mostly been associated with premium product prices and has earned the derisive "Whole Paycheck" nickname. This has happened despite the proliferation and growing popularity of organic groceries, which has driven down prices for such products. A Bloomberg article last year compared the price of a Thanksgiving dinner based on ingredients purchased at different grocery stores, and Whole Foods came out on the top of the list as the most expensive option. (See also: Amazon Announces Lower Prices for Whole Foods Products.)
High prices may not be a problem for Whole Foods' existing customer base, but they are a problem for Amazon's ambitious plans to corner the grocery market. In 2015, Costco Wholesale Corporation (COST) was the largest vendor of organic groceries with sales of $4 billion. Wal-Mart Stores, Inc. (WMT), which ranked the cheapest in the Bloomberg survey, is also emerging as a formidable competitor.
During an earnings call earlier this year, Whole Foods CEO John Mackey highlighted the benefits of being cost conscious. "We can't have too big a gap (in prices) or people will feel like we're trying to take advantage of them," he said. Lower prices on its best-selling products will help Whole Foods entice more customers and increase the average spend of existing customers. The move should boost Amazon's top line and help Whole Foods gain market share from competitors. (See also: Whole Foods 365: The Economics of Discount Organic.)
Second, the move should help drive membership toward the Prime subscription service and provide a windfall of personalized data to Amazon. By integrating the Whole Foods Market Rewards program with Amazon Prime, the e-commerce giant has increased the utility of a Prime membership for a customer's daily life. There is already a significant overlap between Prime members and Whole Foods shoppers. According to some estimates, approximately 73% of Prime members are also Whole Foods customers. Extending the benefits of the Whole Foods rewards program to such members will help Amazon mop up personalized data about customer shopping habits. This integration should also boost the bottom line, as the average spend of Whole Foods rewards program members is two times more than that of other shoppers.
Third, the move will help drive down last-mile delivery costs for Amazon. The Whole Foods acquisition has provided Amazon with 460 stores in dense city neighborhoods – places where it would have been expensive for Amazon to build delivery warehouses. Onsite Amazon lockers will help the company cut down on costs associated with last-mile delivery for its e-commerce division as well as Amazon Fresh. According to a 2013 analysis of Amazon's logistics by MWPL, a specialized supply and logistics firm, a consolidation of food and non-food orders (which is what will occur at Whole Foods stores) has the potential to significantly drive down last-mile delivery costs for Amazon in metropolitan markets. (See also: Unwrapping Amazon's Moves in Logistics.)