Why rivals shouldn’t celebrate Amazon Prime's slow start at Whole Foods

Amazon’s incursion into brick and mortar has been aggressive, but not without its share of course corrections. The latest is a new round of price cuts at Whole Foods amid whispers of slow Prime traffic at the high-end grocer.

On one hand, that's a challenge for the e-commerce giant because Amazon’s using incentive marketing to drive Prime shoppers — who pay a fee to enjoy faster shipping and other perks online — to Whole Foods, a strategy that appears to be falling short. But it's also worth noting Amazon has had slow starts with other retail initiatives, which still spurred vigorous response from competitors and an eventual recovery for Amazon.

Amazon is playing a long game with Whole Foods and Prime. It's a strategy that goes back at least two years when the e-commerce giant introduced a cash-back marketing scheme for a debit or bank account. The push for consumers that prefer cash or debit is a good fit for supermarkets, and a way for Amazon to expand Prime usage outside of e-commerce.

Daniel Acker/Bloomberg

Amazon this week cut prices at Whole Foods, a move that coincides with relatively poor volume — and is perhaps a long overdue response to Whole Foods' reputation for high prices (the brand is often nicknamed "Whole Paycheck"). Only 18% of prime members shop at Whole Foods at least once per month, and 70% of Prime members say they rarely or never shop at Whole Foods, according to a Wolfe Research study that’s been cited in several media outlets. Wolfe Research did not return requests for comment.

Amazon said in an emailed statement that since introducing Prime member discounts last summer, Prime members he save more than $100 million at Whole Foods, adding customer feedback has been "overwhelmingly positive."

But Amazon has been here before. Amazon Go was initially delayed, reportedly due to challenges the cashierless store faced with handling crowds. But that didn’t stop myriad competitors from building their own cashierless technology to serve nervous retailers, anticipating Amazon’s continued use of the Go model. And they were right; Go is now active in several cities, with plans to open 3,000 Amazon Go locations in the next few years. Amazon Go has also inspired larger retailers such as Walmart to open development labs to come up with new in-store innovation.

Amazon Prime’s e-commerce plus Whole Foods, and any other retail network Amazon chooses to build, will still have a omnichannel mix that will be hard for other retailers to match, particularly once mobile ordering and overall shopping habits change in a way that removes the inertia of traditional retail.

“Traditional retailers don’t have an online-to-offline link to customers because most lack a [top level] app to interact with their customers. Amazon does,” said Richard Crone, a payments consultant. "This is just another example of how retailers are getting 'Amazoned.'"

Whole Foods’ new discounts follow earlier price cuts and added sweeteners for Prime subscribers that have driven a narrative that Amazon Prime and Whole Foods would provide fierce competition for grocers, particularly since three quarters of Whole Foods shoppers are Amazon Prime subscribers, according to CNBC. Amazon Prime has more than 100 million members, according to Statista, adding those members spend about $1,300 per year on Amazon, or nearly twice what non-Amazon Prime subscribers spend.

“Grocery customers are conditioned to shop on price in mainline grocery stores,” said Raymond Pucci, director of the Merchant Services Practice at Mercator Advisory group. “So Amazon has to take action on pricing."

Amazon Prime accounts are closely tied to Amazon’s new payment technology initiatives, such as Amazon Go and Alexa. This combination, with lower prices, could still win over consumers to achieve Amazon’s goals in brick and mortar, and to extend Prime’s usage.

“The appeal to Prime customers is surprisingly not achieving enough penetration,” Pucci said. “But I think that could change, especially if Amazon can give them offers too good to refuse, for both in-store and online shopping.”

For competitors, the fact that Amazon still has a lot of untapped potential in its Prime base should be seen as a threat — particularly because those customers are already enrolled in Amazon's ecosystem and can use services such as order-ahead on a moment's notice.

“Order ahead in all its variations requires the customers to register a payment credential and pay in advance to activate the purchase request," Crone said. "The payment registration is the foundation for achieving a CRM-based marketing model."