Amazon Is Quickly Changing Whole Foods, and It's Far From Done

Jeff Bezos' company seems eager to use Amazon Prime to grow Whole Foods, and vice versa.

Author:: Eric Jhonsa
Publish date:: Sep 4, 2017 5:40 PM EDT

Even by the standards of Amazon.com Inc.'s (AMZN) - Get Report traditional breakneck pace, the speed at which the company has moved to close its $13.7 billion acquisition of Whole Foods (announced in mid-June) and begin integrating the upscale supermarket chain with its empire has been pretty impressive.

For all the obvious differences between the businesses, one could draw some parallels with the speed at which Amazon raced to create a broad and unmatched ecosystem for its Alexa voice assistant, or the pace at which Amazon Web Services (AWS) has rolled out one new service after another to maintain a feature set lead against Microsoft Corp. (MSFT) - Get Report and Alphabet Inc./Google (GOOGL) - Get Report .

Here are a few thoughts on Amazon's first moves since officially closing the Whole Foods deal on Monday, and where Jeff Bezos' company might go from here.

1. Amazon's first price cuts for Whole Foods don't move the needle much, but do send a message.

It's hard to fault anyone for thinking that the price cuts Amazon enacted for bananas, apples, avocados, butter and a handful of other Whole Foods offerings amount to a PR stunt. After all, we're talking about 15 items within grocery stores stocking thousands of items, and six of the discounts were for less than 20%. On the surface, the selloffs seen in Walmart Stores Inc. (WMT) - Get Report , Kroger Co. (KR) - Get Report and various other grocery sellers following Amazon's announcement look irrational.

But considering that Amazon -- a company with quite the reputation for sacrificing profits for the sake of long-term growth -- is applying these price cuts to a grocery chain often mockingly referred to as Whole Paycheck, it's hard to ignore the broader message Amazon is trying to send about overhauling Whole Foods' pricing strategy. That's especially true since Amazon is promising more price cuts will arrive, and that it will try to drive prices lower by innovating in fields such as merchandising and logistics.

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2. Amazon's strategy for growing Whole Foods' grocery sales will likely revolve around Amazon Prime.

So much of Amazon's eye-popping U.S. e-commerce growth has been a function of turning Prime into a way of life for consumers. The service has become something that customers leverage for a large variety of weekly and monthly shopping needs, and often without spending a moment comparing prices at other sites, just as long as a Prime-eligible item is cheap enough. And in the process, Amazon profits from membership fees and the high-margin commission, fulfillment and ad services it provides to third-party sellers supporting Prime, even if it doesn't profit that much directly from e-commerce sales.

Thus when Amazon declares Prime will become Whole Foods' customer rewards program once some needed technical work is done, it's not hard to see where things will go from here. Prime members will get major discounts and perks, perhaps enough so that Amazon won't profit much from its in-store sales to them.

Whole Foods nothing more than a distribution center?

Chances are the company will also begin offering Prime members free in-store pickup for Whole Foods orders placed online, thus allowing Amazon to take on Walmart's increasingly popular pickup services. And if Whole Foods' current deal with Instacart doesn't get in the way, reasonably-priced grocery delivery services could be on the way. The fact that there's almost certainly very high overlap between Whole Foods' customer base and Prime's guarantees that such initiatives would see strong uptake.

Along the way, Amazon might start using the additional scale and reach provided by Whole Foods' 460-plus physical grocery stores to grow its fulfillment services business with grocery suppliers looking for a partner to help distribute both online and to physical stores. It also turns Whole Foods stores into vehicles for driving new Prime sign-ups, and possibly in time a justification for raising Prime's $99 per year U.S. membership fee, which many consumers no doubt already view as a bargain.

3. Amazon appears keen to use Whole Foods stores for non-grocery purposes, but will probably move cautiously.

Amazon has already promised to set up order pick-up lockers within Whole Foods locations, and has already begun selling Echo devices at some stores (again, the speed at which they're moving here is remarkable). Both of these moves were no-brainers: Amazon has already partnered with retailers such as 7-Eleven to install pick-up lockers within stores, and Echo stands take up little space and are useful for branding purposes.

But one could see bigger moves down the line. For example, selling a larger array of Amazon-branded items, some of which are seeing booming sales on Amazon's site and apps. And perhaps an assortment of non-food consumer staples from major third-party sellers. Amazon could also use Whole Foods stores to extend its recently-launched Instant Pickup service, which takes on convenience stores by giving Prime members the ability to pick up food, drinks and other "need-it-now items" from lockers within two minutes of ordering them via Amazon's shopping app.

But Amazon will probably take its time with such moves. Partly because it won't want to badly disrupt Whole Foods' traditional shopping experience -- making that experience more like shopping at Walmart isn't in Amazon's interests. And partly because the company has already signaled it's still in the trial-and-error stage when it comes to physical retail initiatives. A company that prides itself on going the extra mile to provide a superb shopping experience isn't going to make big commitments to major new offline services without first learning what consumers like and what they don't.

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Editors' pick: Originally published Aug. 29.