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Amazon Primes Itself to Take on a Fresh New Market

The company wants to conquer a whole new area that's outside its core expertise.
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In the eyes of investors, Amazon's performance and future prospects are viewed and interpreted in terms of the health of its cloud division.

And with good reason: Amazon Web Services is the sales engine or locomotive of the e-commerce giant. In the third quarter, AWS accounted for all of Amazon's $4.9 billion in operating income. It will probably still be the same for the fourth quarter and the next few months as the cloud infrastructure keeps growing thanks to a period of massive digital transformations occurring for enterprises all over the world.

The second thing that investors are interested in is Amazon's investments in the entertainment industry and also in devices and hardware aka Fire, Echo, Astro, Glow, etc. Or how the company intends to compete with Netflix  (NFLX) - Get Free Report, Disney  (DIS) - Get Free Report, Apple  (AAPL) - Get Free Report TV+, and HBO MAX in streaming and its thundering projects in sport with the purchase of numerous television rights in football and soccer, and the financing of films and original content for Prime.

Once investors have looked at all of this, they will then turn to the grocery business. But generally, their reading or interest is focused on one point: how much did this segment of the activity cost the company? 

Basically, Whole Foods and Amazon Fresh chains are seen more as millstones for Amazon, especially since numerous articles have focused on the working conditions of employees in warehouses, the desire for unionization of employees. 

Whole Foods

Amazon Faces Backlash Over Worker Conditions

Amazon is currently defending itself against this bad publicity and places an important place in its press releases on the way in which the company treats its employees. The Seattle-based company also does not stop hammering the benefits granted to its employees and the various salary increases made.

"Job seekers in the U.S. can receive an immediate contingent offer for seasonal roles with an average starting pay of $18 per hour, sign-on bonuses up to $3,000, an additional $3 per hour depending on shifts in many locations, and the opportunity to transition to long-term careers," Amazon wrote in its Q3 earnings press release.

All of these efforts, however, confirm investors' sentiment that grocery and brick-and-mortar stores are a headache for Amazon.

"In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners”, warned CEO Andy Jassy.

But looking closely, Whole Foods and Amazon Fresh have come a long way and made strides in the grocery wars. Certainly, they are still far from the volumes and traffic of Walmart  (WMT) - Get Free Report, Trader Joe's, Safeway or Kroger  (KR) - Get Free Report.

But "Amazon has emerged as a leading brick-and-mortar grocery player through its Whole Foods and Amazon Fresh brands," according to foot traffic analytics firm Placer.ai.

Sales from physical stores - products sales where customers physically select items in a store - increased by 13% in the third quarter compared to the third quarter of 2020. In 2021, they are also up from one quarter to another: sales went from $3.92 billion in the first quarter to $4.2 billion in the second quarter and finally to $4.27 billion in the third quarter.

Whole Foods Kicked Off Amazon's Grocery Efforts

Amazon acquired Whole Foods in 2017 as a first step before launching its own chain of grocery stores. The chain, which features organic products, was struggling but Amazon saw it as an opportunity to get its hands on a nationally distributed store fleet and gain access to, says Placer.ai,  troves of grocery shopping data before launching its own branded grocery venture.

But the Covid-19 pandemic has raised fears of a desertion of chain stores as consumers change their shopping habits.

While Whole Foods may have missed out on the pandemic-fueled supermarket boom, the natural grocery leader’s recent foot traffic data has proved naysayers wrong, according to the Placer.ai.

"We have nearly 40 new stores in the pipeline," Whole Foods announced last May. Basically, the chain anticipates a growth in its activity.

The brand, which saw foot traffic collapse during the pandemic, is recovering well. In December, visits were down only 5.2% compared to December 2019. That’s a far cry from February 2021, when they were down 22%, Placer.ai's study shows. 

Amazon Fresh

Amazon Fresh is surfing on the local eating trend that has taken off with the pandemic. While there are currently few Amazon Fresh stores, traffic to those that exist continues to grow.

Placer.ai said to have studied the data of locations in California and Illinois, and examined cross-shopping patterns for the brand as a whole. And this shows an increase in visit.

Between the second-quarter and the fourth-quarter, visits grew for every single one of the eight stores analyzed.

"While part of the growth may be due to initial Covid-related capacity restrictions, the fact that store occupancy rose across the board at these early locations indicates that these venues are generating increased demand over time – a positive sign for any retailer," the study found.

Given the fact that visits still increased, the reduction in True Trade Area size must mean that the stores are getting better at catering to local customers – and so can draw more foot traffic from a smaller area. 

But the report warns that "there are a variety of factors that play into TTA size, from work from home shifts to COVID variants, so truly understanding the real reach of each location may require more time."

Whole Foods And Amazon Fresh Not Competitors

Cross-shopping data compiled by Placer.ai shows that for the last six months of 2021,  Amazon Fresh customers shop at Ralphs and Aldi, and shop less and less at Whole Foods, which means that the competition between Amazon's two grocery chains has decreased.

"While Amazon Fresh is positioning itself as a value grocer, whose primary competition comes from grocers such as Ralphs and Aldi, Whole Foods is positioned as a premium supermarket chain that appeals to a whole different consumer base. With Whole Foods and Amazon Fresh catering to different segments, Amazon is set to strengthen its standing as an offline grocery leader in 2022," the study concludes.