Amazon Needs More Whole Foods Stores

Amazon (AMZN 1.66%) just took another step in unleashing the power of Whole Foods. The e-commerce giant said it would start offering discounts for Prime members on Whole Foods items that are already on sale. The company said members of its loyalty program will get an additional 10% off sale items, starting with stores in Florida this week as it rolls out the program nationwide this summer. 

It's the latest example of Amazon's leveraging Whole Foods to add more weight to Prime, which the company recently said reached 100 million members. Amazon has begun offering free two-hour delivery for Prime members from Whole Foods locations in some markets and plans to make it available at stores nationwide by the end of the year. With those discounts and two-hour delivery both in place in that time frame, Amazon will have a powerful value proposition for Prime customers and potential sign-ups. However, its competitors aren't standing still.

Image source: Amazon/Whole Foods.

Target (TGT 1.03%) acquired Shipt last year to help it enable same-day grocery delivery, and announced this week that Target Restock, its next-day delivery service for non-perishables is available nationwide. The service is free for Target REDcard holders or costs $2.99 per delivery otherwise. 

Walmart (WMT 1.51%) is aggressively expanding its grocery pickup service with plans to make it available at more than 2,000 stores in the U.S. by the end of the year, and the company is ramping up its own grocery delivery with plans to deliver from 800 stores in 100 metro areas, making grocery delivery available to 40% of U.S. households. Meanwhile, its membership-based warehouse chain, Sam's Club, recently partnered with Instacart to enable same-day grocery delivery.

Last year, Costco Wholesale (COST 0.29%) said it would also offer same-day delivery through Instacart for perishables, and free two-day delivery for non-perishables with an order minimum of $75. 

Finally, Kroger (KR 0.56%) is also rapidly expanding its own grocery pickup program, Clicklist, with over 1,000 locations open today and plans to reach 2,000 by the end of the year. For grocery delivery, Kroger has partnered with Instacart, Shipt, and Uber. 

A numbers game

There's little doubt about the consumer appeal of Amazon Prime, as the program, which offers benefits including free two-day delivery on millions of items, free video and music streaming, and now perks at Whole Foods, has attracted 100 million members and its renewal rates are estimated to be above 90%. However, Amazon's biggest disadvantage in groceries, even with Whole Foods under its belt and the power of Prime, is that its store footprint significantly lags its rivals. The chart below shows the details.  

Data source: Company filings.

The disparity between Whole Foods and its larger rivals is clear. Even with the organic grocery chain, Amazon doesn't have a tenth of the domestic stores that Walmart has, and it significantly lags behind Kroger and Target. While Whole Foods has nearly as many locations as Costco, investors should be mindful that Costco locations are more than three times the size of the average Whole Foods, meaning the warehouse chain has a much larger footprint.

In other words, for Amazon to truly compete on scale in grocery with companies like Walmart and Target, it will need to open more stores in parts of the country it doesn't already reach. Only then will it be able to fully leverage the power of Prime and the Whole Foods brand.

Amazon has not yet made any announcement on ramping up new Whole Foods stores, and the company says it has just three in development on its website, a 365 discount store in Upland, CA, and two Whole Foods stores, one in Kansas City and one in Charlotte. 

If the two-hour delivery program lives up to Amazon's hopes, the company would be wise to expand its reach by opening new Whole Foods stores. As it stands, Amazon controls just about 2% of the domestic grocery market, leaving plenty of opportunity for growth.