Amazon adding Prime perks at Whole Foods

After several weeks of speculation, the news broker earlier this month that Amazon is planning new Whole Foods benefits for its Prime members. According to a CNBC report, "the new perks will bring the might of Amazon's membership program to the grocery industry, folding Whole Foods into a network other grocers are struggling to compete with."

The report also stated that about 75 percent of Whole Foods shoppers are Amazon Prime members, but less than 20 percent of Amazon Prime members shop at Whole Foods.

Sources told CNBC that Whole Foods will begin offering Prime members an additional 10 percent off of already discounted products. The discount would be in addition to perks that have already been rolled out, including free delivery of Whole Foods products to Prime members in certain locations, 5 percent cash back when members use the Prime Visa rewards card at Whole Foods stores, and other exclusive member deals.

The news of these new perks has come at nearly the same time Amazon announced a $20 annual fee increase for Prime membership, and a couple weeks after Whole Foods announced the end of its loyalty program.

For food retailers, the new perks turn Whole Foods into a more formidable competitor, expanding its reach well beyond its 400 store footprint and combating the grocer's major weakness - high prices.

The impact of the Amazon - Whole Foods deal may be far-reaching

Several media outlets and industry experts have weighed in recently with their thoughts on Amazon's planned $13.7 billion purchase of Whole Foods, including The Washington Post, in which its "On Leadership" column cited several "telling comments" made by Whole Foods CEO John Mackey. Sample comments include the following.

• Mackey admitted that Whole Foods may be too employee-focused, and although he didn't back down from the importance of treating employees well, he said that Amazon is "more customer-centric than we are... we're gonna become as customer-centric as Amazon."
• In a sharp contrast from when Zappos was purchased by Amazon and pledged to remain independent, Mackey said that "when this deal closes, we're all Amazon people."
• Mackey acknowledged that his company has been a little behind in technology as compared to Amazon, and pledged that "we'll go to the front of the class, eventually, in the grocery business."

A subsequent article in The Washington Post  reported on the deal's potential impact on small farmers and food producers, who are worried that Amazon will use its market power to further centralize production and boost larger, industrialized organic operations. In addition, industry activists and farmers advocates are fearful of the pressure Amazon may put on producers for price concessions, which could cause them to compromise on environmental and formulation standards.

According to an article written by CNBC's Chantel McGee, a data scientist claims that the merger is less about stores and more about data. Specifically, Boston College Professor Kenneth Sanford said that one of Amazon's goals should be to combine the data it already collects online and via Echo and Alexa, with Whole Foods' customer transaction data.

The data collected would enable the company to predict what customers need and automatically send it to them. "Amazon will know what's in your refrigerator already and be able to deliver extra turmeric when you need it," said Sanford.

Grocery e-commerce retailer Instacart is already working towards this goal. According to Jeremy Stanley, the company's vice president of data science, Instacart uses customer behavioral data and search activity to anticipate what a customer wants or might like.

"One of the wonderful things about groceries is that compared to other e-commerce purchases, groceries are habitual and frequent," Stanley said. "Groceries are really personal... and I think data can really change the way people buy food."

Supermarket News reported on the deal's potential impact on competitors, including Instacart, whose service generates more than $200 million in sales annually for Whole Foods. Should Amazon decide to pull out of the deal in favor of its own delivery service, it could harm Instacart, and perhaps Instacart's other customers as well. Furthermore, rather than replacing Instacart, Amazon could attempt to purchase it.

Sprouts Farmers Market has been competing successfully against Whole Foods in certain markets, and has made plans to partner with Amazon Prime Now for e-commerce. Perhaps the Amazon - Whole Foods deal could kill this partnership, or even make Sprouts an attractive Amazon target. Having Whole Foods and Sprouts under the same ownership could save Whole Foods from spending on its 365 format since Sprouts could fulfill the small format need.

Walmart's success integrating physical and digital assets, which has led to strong sales results in recent years, has not gone unnoticed by Amazon. And grocery, which generates frequent and habitual trips, has been central to Walmart's strategy, not to mention the company's expanded offerings in grocery pickup and delivery strategies. As the Supermarket News article points out, Amazon and Walmart are gunning for each other.

Lastly, natural and organic food consumers have seen big retailers like Costco and Kroger catch on to the trend that Whole Foods pioneered, and these retailers have hurt Whole Foods on price. With Amazon's buying power, that price advantage may eventually disappear - or at least lesson - resulting in Whole Foods recapturing sales at the expense of others.

Analyst says Albertsons IPO speculation is premature

The supermarket trade publications have been buzzing with reports about an Albertsons IPO now that the Safeway merger has taken place. However, a Wall Street analyst told Supermarket News last week that the reports are probably premature.

The analyst cited the difference in the two companies' go-to-market strategies, and the fact that Safeway has a loyalty card but Albertsons doesn't.

Despite CNBC stating that "sources with knowledge of the matter" have said Albertsons' holding company has hired bankers in anticipation of an IPO later this year, the analyst believes that "considering an IPO without any idea of how the integration is going or what the business will look like or how well the executives will work together is very premature."

Reporter uncovers reasons for Costco's success

President Obama visited a Costco in Maryland yesterday to shake hands with people and do whatever else Presidents do when they visit the suburbs and stop traffic. On a related note, Harriet Edleson from US News & World Report spoke recently with a number of Costco members, company executives and retail analysts to get the inside story on what attracts 72 million members and results in $103 billion in annual sales. And she didn't disrupt traffic at all!

Harriet came up with "seven things you should know."

• If you want brand names for less, you'll find them at Costco.
• When you go abroad, you can still shop.
• Quality at the lowest price means value. (Costco's typical markup is 10%, compared to 20% or 30% at other food retailers.)
• If you buy an item by mistake, you can bring it back for a cash refund.
• Kirkland is made for Costco. (Twenty percent of all items in a Costco warehouse are sold under the Kirkland name.)
• Food is key.
• Hot dog and soda is a winning combination. (Costco sells 109 million hot dog and soda combinations per year at $1.50.)

For the complete story, click here.

An added note - about a year ago I watched a CNBC special on Costco, and the key fact that stuck with me was that the company generally breaks even on everything it sells, which leaves the membership fee as pure profit. That's 72 million members paying anywhere from $55 to $110!