Amazon’s Whole Foods Prime isn’t just about fresh kale at your doorstep

Amazon’s $14 billion acquisition of the struggling organics chain Whole Foods sent the $800 billion industry reeling, driving competitor stocks, such as Kroger’s, down by as much as nine percent. The online retailer’s transformation of Whole Foods has taken off with Amazon’s trademark two-hour delivery. As of yet, Amazon has launched Whole Foods Prime in four cities – Austin, Dallas, Virginia Beach and Cincinnati, with plans to expand more this year. With Whole Foods, Amazon has brought the concept of an “everything store” further into the realm of possibility.

Whole Foods, the first mover into organic produce, enjoyed an environment with ever-growing demand and virtually no competition. Between 2005 and 2015, the Organic Trade Association states that sales of organic food increased by 209 percent. The main driver was millennials, who, between the ages of 18 and 34, are the largest buyers of organics and have forced grocery chains to adapt to a new reality of food quality and transparent sourcing. It was only a matter of time before large grocers, like Walmart and Kroger, were going to step up their game. Forced to be competitive in an industry that Forbes ranked the fourth-least-profitable in 2016, Whole Foods struggled to maintain its brand equity while lowering prices. Traditionally, supermarkets have an average profit margin between one to two percent; natural, organic markets average between 3.5 to six percent.

Without the experience as a brick-and-mortar business, Amazon Fresh had struggled with economic challenges to delivering fresh grocery and inventory management. Taking over the Austin-based grocer was an opportunity for Amazon to gain a physical footprint and expand its network. While Whole Foods’ 473 stores across the United States enables Amazon to interact with customers face-to-face, the grocer’s established connections and contracts enhance Amazon’s negotiation power with vendors, producer and farmers. The online retailer set out to “Amazon-ify” Whole Foods by decreasing the premium on Whole Foods’ goods, further shaking the industry and its competitors. Customers began to see tech items, like the Kindle and Echo smart speakers, in stores. While there are certainly more changes to come at Whole Foods, the acquisition has served as another stepping stone to achieve Amazon’s ambitious goal of transforming consumer culture.

Next stop is healthcare. Amazon, Berkshire Hathaway and JP Morgan Chase announced on January 30 to form an independent healthcare company for their U.S. employees. The alliance is an ambitious entry to “attack a notoriously inefficient, intractable web of doctors, hospitals, insurers and pharmaceutical companies,” according to the New York Times. The Kaiser Family Foundation found that average premiums for family coverage for employees rose to $18,764 in 2017, an increase of 19 percent since 2012. As Amazon has done in the grocery space, this announcement rattled stocks of insurers and other major health companies; shares of UnitedHealth Group and Anthem, for instance, fell by more than five percent. While the three companies placed emphasis on using technology to simplify care, there were no details on how they planned to disrupt the healthcare industry. Yet, from its largest acquisition to date of Whole Foods, analysts predict that Amazon will eventually convert parts of stores into pharmacies or clinics. In fact, analysts largely agree that CVS’ $69 billion bid for Aetna in December last year was sparked by Amazon’s interest in the industry, particularly in prescription drugs. The deal, yet to be approved by regulators, would insulate both companies in the case that Amazon aggressively moved into the space.

On February 20, CNBC wrote that “Amazon has quietly launched an exclusive line of over-the-counter (OTC) health products,” challenging pharmacy retail chains and putting pressure on prices. In addition to Amazon’s Basic Care Line launched in August last year, which includes 60 products such as ibuprofen and allergy medicine, these OTC products, made by private-label manufacturer Perrigo, puts Amazon at a competitive advantage over other retailers. Though messy regulations may pose a serious obstacle for Amazon to get its foot in the door of prescription drugs, selling private-label OTC drugs is a short-term, yet lucrative option. According to Euromonitor, private-label brands represent 31 percent, or $8.4 billion, of the U.S. OTC industry and there is much room for growth. Unlike branded OTC medicine such as Advil, exclusive brands like Perrigo, CNBC says, “reap larger margins… and stores can keep them priced relatively close to the name brand as long as they’re less expensive.” Thanks to classic Amazon price tactics, customers can purchase a 200mg bottle of ibuprofen for $8.49 online in the Perrigo GoodSense brand while the same product would cost $15.99 in CVS.

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Amazon, with its acquisitions (from Goodreads to Whole Foods) and its investments (from Living Social to Songza), hopes to become the operating system for the home—an ultimate life bundle, and, as the Atlantic put it, “a single membership program to bind consumers to every possible commercial need.” For the company, it doesn’t matter if Prime in itself is not profitable; in fact, Forrester Research estimates that the free shipping option, the largest perk to a Prime membership, costs the company $1 billion a year. The lifetime value of a Prime subscriber is where the big bucks are at. According to Consumer Intelligence Research Partners last October, 63 percent (or 90 million) Amazon users were Prime subscribers and spend $1,300 per year, compared with the $700 spend of non-members. As Amazon continues to enrich Prime, the online retailer will eventually become the only-stop destination for customers’ searches. Amazon has made strides monopolizing customer searches with Alexa, which CEO Jeff Bezos has said the company sold “tens of millions” of. The more customers buy and use Alexa, the more customers will be spending disposable income solely on AmazonAmazon’s private labels often don’t appear to have any affiliation with the company. Yet, I trust that Alexa, if you ask for batteries, will place a pack of Amazon’s batteries in your cart. And Amazon’s private-labelled batteries, for instance, now account for 94 percent of all batteries sold on the site.

Due to its digital and physical presence in the economy, Amazon’s 354 million products compete directly with a least 129 major corporations, including Blue Apron and Macy’s. However, Amazon doesn’t actually fit the profile of a traditional monopolist. Online spending, where Amazon’s core business is, only accounts for 8 percent of the $4.8 trillion Americans spend on retail purchases, according to the U.S. Census Bureau. In 2017, that meant that Amazon had the top sales in e-commerce, accounting for an estimated 44 percent. Runner up was eBay at an estimated 7 percent, according to eMarketer. Armed with consumer intelligence and cheap capital, the online giant will sweep out competitors by exploiting prices, having more freedom to face speed bumps along the way. As the “marketplace keeps bidding up the stocks… Amazon can now borrow for less than the cost of what China can borrow money,” said NYU marketing professor Scott Galloway. Eventually, with weak or no formidable competitors, Amazon will be free to raise prices and may “degrade product quality, variety, and innovation,” according to Quartz. The company certainly knows what it’s doing—anticipating potential antitrust scrutiny, the Washington Business Journal reported that Amazon increased its lobbying budget to $11.4 million in 2016, a six-fold increase from 2011. In fact, two former heads of the Department of Justice Antitrust Division, from the Obama and George W. Bush Administrations, assisted Amazon as lobbyists in the Whole Foods acquisition.

Is an Amazon detox in order? You might find that much harder than you think—just like how you may think that you, as a Prime subscriber, do not spend the average $1,300 a year at Amazon. Go have a look at your 2017 invoice report, you may be surprised just as much as I was. It’s difficult to ignore that Amazon’s success has been at the cost of others. While this may be just “good business,” its increasing scope into our daily lives do raise concerns. Yet, like a moth to a flame, we just can’t pass up a good deal.

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