Analyst: Forget price cuts and focus on Whole Foods' delivery potential
- Whole Foods stores will generate the greatest value for Amazon not through lowering prices, but rather through offering expanded same-day delivery through Prime Now, according to a note by Credit Suisse analyst Stephen Ju, cited by CNBC. Ju raised his price target for Amazon shares 37%, to $1,350.
- Currently, Prime Now coverage encompasses 198 Whole Foods stores out of 460 total, meaning there’s an opportunity for Amazon to bring the service to new locations.
- “As the consumer value proposition for Amazon has always been the combination of price, selection, and delivery we believe the current headlines about price reductions at Whole Foods will be accompanied by expansion of Prime Now delivery-enabled zip codes," Ju wrote in his note to investors.
Analysts and media outlets have been preoccupied with the select discounts Amazon has instituted at Whole Foods stores, how those discounts have affected store traffic and whether or not Amazon might honor its pledge to make organic “affordable for all.”
But according to Credit Suisse’s Stephen Ju, as well as numerous others, whether or not Amazon can dramatically lower Whole Foods’ prices is less important than the e-tailer’s ability to harness these stores as delivery hubs for its Prime Now service.
Offering one- and two-hour delivery on thousands of items, including groceries, Prime Now has grown quickly since it launched in 2014, and is now available in more than two dozen U.S. cities. With 460 Whole Foods stores now in its arsenal, Amazon can improve its selection of products and speed up its shipping times. It can also expand the service to more markets, including the many second-tier cities and suburbs where Whole Foods operates.
Expanding delivery of produce and other perishable items, in particular, has been a challenge for Amazon. The company has partnered with grocery stores in its Prime Now markets, but its dedicated grocery service, AmazonFresh, has grown very slowly since it launched a decade ago. The main challenge here is cold storage facilities, which are expensive to build and maintain. With its Whole Foods purchase, Amazon gains a network of stores as well as distribution centers that can store and ship perishables.
With this network now secured, the question becomes, how will Amazon acquire customers and grab e-commerce share? Continuing to leverage its many Prime members is one strategy. Considering Amazon’s willingness to lose a lot of money to gain share, it could also offer free or steeply discounted delivery and store pickup to shoppers.
Amazon acquired a strong brand in Whole Foods, but the focus going forward will be on how the grocer can improve the e-tailer’s operations, rather than the other way around. Whole Foods’ 365 brand has boosted sales on Amazon.com, while many industry observers note the specialty grocer functions as a test lab to gather consumer data. As Amazon looks to dominate online grocery, its Whole Foods stores come to be seen not just as brick-and-mortar grocery stores, but as all-important food delivery hubs, as well.
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