Building out dozens of new fulfillment centers every year is already pretty expensive for Amazon (NASDAQ:AMZN). If Amazon intends to expand Whole Foods Market, it'll represent yet another source of capital expenditure growth for Amazon.
But the grocery store chain could provide a way to reduce the net cost of expanding its distribution footprint.
Amazon is looking to acquire storefronts with larger square footage to pull double duty as Whole Foods stores and distribution centers, according to a report from Bloomberg. The move could make Amazon's capital expenditures more efficient and provide a way to compete with the physical retail presences of Walmart (NYSE:WMT) and Target (NYSE:TGT).
The massive increase in Amazon's capital spending
Amazon spent nearly $12 billion on capital expenditures last year, up 53% year over year. Principal repayments on capital leases totaled $4.8 billion, up 24%, and property acquired under capital leases totaled $9.6 billion, up 69%. A lot of that money went toward building out new datacenters for Amazon Web Services, but Amazon also expanded its warehouse square footage by about 30% last year coming off of a similar increase in 2016.
The rapid expansion in its warehouse footprint is due to the growth of Prime. Amazon says it added more Prime members last year than in any year before, both in the U.S. and globally, and it shipped more than 5 billion items with Prime in 2017. Getting all of those items to customers within two days requires a lot of warehouse space, and it requires those warehouses to be close to customers.
It's the one area where Amazon is playing catch-up to Walmart and Target, which both benefit from years of building out a physical footprint across the country. Target stores fulfilled more than 70% of online orders in the last two months of 2017. Walmart has run several experiments to leverage its physical footprint for online order delivery, and it offers curbside pickup for online grocery orders at over 1,000 locations.
Copying the model with Whole Foods stores
Amazon has already started to leverage Whole Foods locations for its online orders. It's installed lockers at some locations for customers to pick up items, and it's set up displays for its devices like the Echo and Kindle.
But if Amazon could use Whole Foods locations to store popular items like best-selling books and electronics, it could reduce the need for stand-alone warehouses. The incremental cost of leasing a building with twice the square footage of the average space -- 40,000 square feet -- is likely considerably less than leasing two buildings. Meanwhile, the profits from the Whole Foods store ought to offset the incremental expense of buying a bigger building, so the warehouse practically pays for itself.
What's more, Amazon is already delivering orders from Whole Foods locations to Prime subscribers. Delivering both grocery and general merchandise orders from the same location will increase efficiency, and it could be more convenient for Amazon shoppers, too.
It's unclear whether Amazon would stock non-grocery items on Whole Foods shelves or just keep them in storage. If it did, it could pose a bigger threat to Walmart and Target, which position themselves as one-stop shopping for everything you need.
Combining Whole Foods locations with additional warehouse space is a creative way for Amazon to maximize the efficiency of its capital expenditures going forward, and perhaps slow down the growth in spending.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.