Please ensure Javascript is enabled for purposes of website accessibility

Amazon's Whole Foods Grocery Delivery Is Being Overwhelmed By Demand

By Andrew Tseng - Mar 19, 2020 at 7:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For the first time under Amazon's ownership, there is strong evidence that Whole Foods is taking off.

As most Americans hunker down at home because of the coronavirus pandemic, Amazon.com's (AMZN -3.21%) Whole Foods is seeing overwhelming grocery delivery demand. This shouldn't be shocking, considering that food is a core necessity, and grocery delivery allows customers to avoid entering stores where coronavirus may be present. But it's also being driven by the incredible value proposition of having Whole Foods groceries delivered to Prime members' doors for free.

The backstory

In Amazon's fourth-quarter earnings release, founder and CEO Jeff Bezos wrote that Prime members "now have free two-hour grocery delivery from Amazon Fresh and Whole Foods Market in more than 2,000 U.S. cities and towns." Delivery through Amazon Fresh had previously cost $14.99 per month, but Amazon dropped the extra charge. The company said grocery delivery orders from Amazon Fresh and Whole Foods Market more than doubled in the fourth quarter year-over-year.

A delivery person delivering a brown bag of groceries.

Image source: Getty Images.

Most estimates suggest more than half of U.S. households are Prime members today. That means they are paying $119 per year for Prime member benefits, which include free two-day shipping on millions of items, free one-day shipping on over 10 million items, free same-day shipping on three million items with a $35 minimum order, Amazon Prime streaming video, and unlimited photo storage, among several other perks. When Amazon throws in grocery delivery from Whole Foods for no additional charge for Prime members, that's an incredible value proposition. So it's not surprising it is seeing high demand, especially now.

What's happening

Given the coronavirus pandemic, grocery delivery demand is skyrocketing. When shopping on Whole Foods on Amazon's website, customers now see a big, bold message stating, "Inventory and delivery availability may be temporarily due to increased demand. Confirm availability at checkout."

Further, when customers click on "Add to Cart" for items, a pop-up message for at least some items states, "Item not added to cart" and "We're sorry, this item just became unavailable." Clearly, the business is being overwhelmed by delivery demand. On March 15, Amazon Logistics representatives told customers waiting for delayed orders that the app coordinating delivery drivers nationwide had temporarily crashed. Amazon later emailed customers to apologize for delays and cancellations in their grocery orders, offering a $50 credit on future purchases as compensation.

This is consistent with trends that other grocery delivery companies are seeing as well. For example, Instacart, Walmart Grocery, and Shipt are seeing have seen their daily app downloads surge by 218%, 160%, and 124%, respectively, compared to February levels. Instacart gave the following statement to the San Diego Union-Tribune:

This past weekend, we saw the highest customer demand in Instacart's history in terms of groceries sold on our platform. As consumer demand continues to climb, our teams are working around the clock to ensure we can reliably serve the millions of customers turning to Instacart as an essential service provider.

So what?

In Amazon's financial reports, it discloses sales from physical stores. That line is mostly made up of Whole Foods, which had 470 stores the last time that information was disclosed. Since Amazon acquired Whole Foods, the company's physical store sales have been relatively disappointing. Over the last five quarters, physical store sales declined 3%, grew 1%, grew 1%, declined 1%, and declined 1%, respectively. That has led most observers to think the performance of Whole Foods under Amazon's ownership has been lackluster.

However, the company doesn't count online ordering from Whole Foods within physical store sales. Instead, online orders are included in the company's "online stores" sales line, where it is lumped in with Amazon's massive e-commerce business. That makes it impossible to know how well Whole Foods has been doing as a whole between in-store buying and online ordering.

But the latest overwhelming demand that Whole Foods delivery is seeing finally gives us clear evidence that at the very least, the online portion of the business is booming. This is important for Amazon, because the grocery category is the single largest retail category in the U.S., representing $665 billion in annual retail sales.

The company been iterating on Amazon Fresh and other grocery models for over a decade in an effort to figure out a model that would successfully penetrate this huge category. It seems like the coronavirus pandemic is accelerating usage of Whole Foods delivery and is probably introducing new customers to the service who might otherwise not have used it. That could create an online grocery ordering habit that would benefit Amazon's long-term grocery ambitions. Some companies will emerge from this period stronger than when they entered it. Investors should consider Amazon one of them.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,082.00 (-3.21%) $-69.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.