Amazon’s plan to offer a 10% discount on Whole Foods items to Amazon Prime members is a “meaningful signal about Amazon’s laser focus on taking share in the $800 billion US grocery industry,” Morgan Stanley analyst Brian Nowak wrote in a note to clients out Wednesday.
The 10% discount will also apply to “already discounted” items at Whole Foods stores, Nowak said. Amazon has already been slashing prices at Whole Foods as it continues its effort to transform perception from the high-end grocer it once was to the grocer-for-the-masses it may be in the midst of becoming.
“These reductions have been important to driving traffic,” Nowak wrote. “These incremental reductions could make Whole Foods cheaper than conventional grocery stores for Prime members.”
And the price cuts are also a great way for Amazon to reel in more Prime customers, which was one of the main synergies Amazon had envisioned when it bought Whole Foods. The “5-10% savings on groceries (and free shipping) can go a long way toward justifying Prime membership…even at $120 per year,” Nowak said.
And Nowak thinks Amazon’s ownership of Whole Foods has fundamentally created room for more Prime subscription growth as only about 62% of Whole Foods shoppers are currently Prime members.
Amazon has been causing a raucous in groceries since it acquired Whole Foods for $13 billion in the summer of 2017. When the acquisition was announced, grocery stocks were hit hard with Kroger, Walmart, Target, and Sprouts Farmers Market falling as much as 8%. Those stocks tumbled again when Amazon slashed prices at Whole Foods.
Now, with Amazon starting to run Whole Foods like just another one of its e-commerce businesses, the rest of the industry has to adapt in order to survive. Amazon’s tech-minded approach is forcing other grocers to focus on delivering food to customers through apps and online orders.
Nowak has a $1,700 per share price target on Amazon, about 8% above its current levels.
Amazon is up more than 35% this year.
Source: Markets Insider