As most Americans hunker down at home because of the coronavirus pandemic, Amazon.com's (AMZN -1.14%) 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.
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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.
