Amazon Looks to Whole Foods to Boost Online Grocery Shopping

By Laura Stevens and Heather Haddon Features Dow Jones Newswires

Amazon.com Inc. this week added hundreds of new Whole Foods products to its website in a bid to get consumers to finally buy their groceries online.

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Online grocery shopping accounts for less than 5% of the nearly $800 billion in food and beverage sales in the U.S., despite Amazon and others rolling out deliveries in major U.S. metro areas. Buying groceries online has been slow to take hold because of consumers' desire to touch and smell fresh produce before buying it, as well as price concerns and limits to where it's available.

Now Amazon's $13.5 billion acquisition of grocery chain Whole Foods Market Inc., which closed this week, is providing a new impetus for online grocery shopping. Amazon has expanded its catalog with Whole Foods groceries at the same prices as in stores, and could use Whole Foods' 470 stores as hubs for online pickups and deliveries.

Food retailers that have both physical stores and e-commerce offerings have done better in capturing the online grocery market so far. Twenty-two percent of consumers surveyed in April by Morgan Stanley had shopped for food from a nearby supermarket's website, while only 13% had done so from an online-only grocery service.

"I don't want some guy picking out my tomatoes or my zucchini. I'm just going to get shoveled whatever is on top of the bin," said Skip Olinger, a 64-year-old retired shipping container executive from Sonoma, Calif., who spends upward of $100 a week at a local Whole Foods.

While stock prices of traditional grocers have tanked in the past week over Amazon's price cuts in Whole Foods stores, the greater menace to their business could be Amazon's online grocery ambitions, especially if Amazon drives down prices further, analysts said.

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"The biggest threat is what Amazon can do online. There's only so much reach the stores can achieve," said William Kirk, an analyst for RBC Capital Markets, LLC.

Amazon declined to comment beyond a statement issued last week, which said that several of Whole Foods private labels, including 365 Everyday Value, would be available on Amazon.com and via several of its grocery delivery options.

The new Whole Foods category on Amazon.com for customers of AmazonFresh, its online grocery delivery service, turns up nearly 900 results for everything from $4.99 organic vanilla ice cream to $6.99 creamy almond butter. On Amazon's Prime Now app, which offers faster delivery, about 90 products are available to start. Amazon said previously it would add other private label brands to its selection.

Amazon's strategy for selling Whole Foods online is likely twofold, analysts say. Private label products are typically higher-margin due to lower production and marketing costs, helping add a profitable new category on the site. And Whole Foods' cachet as a healthy lifestyle brand could entice more shoppers to add food to their online shopping cart.

Amazon's push into food started in earnest in 2007, when it launched AmazonFresh in Seattle. Fresh costs $15 extra a month on top of Amazon's $99 annual Prime membership fee. But it's tricky to handle perishable items, such as ice cream in the summer heat, and the business is costly, requiring expensive refrigerated storage that thins profit margins. After testing it for about six years in its hometown, Amazon rolled it out to more than 20 U.S. markets, as well as London, Berlin and Tokyo.

Adding to its grocery business, Amazon's Prime Now offers a more limited selection of food with one- and two-hour delivery. In some of the 50 markets where it operates, Prime Now joined in grocery delivery with Sprouts Farmers Markets Inc. The online retail giant recently opened two brick-and-mortar AmazonFresh stores in Seattle for pickup of online orders.

But online grocery has become increasingly crowded. Delivery services such as Instacart Inc., Peapod LLC, Shipt Inc. and FreshDirect LLC have expanded nationally. Instacart has handled Whole Foods online orders since 2014. (Instacart executives have declined to say what Amazon's merger with Whole Foods will mean for its business.)

Wal-Mart Stores Inc. and Kroger Co. have rolled out in-store pickup for online orders.

While Amazon hasn't outlined exactly how it might use Whole Foods to bolster its online delivery options, people familiar with the matter have said that it's likely to introduce online grocery pickup in stores. In an announcement last week, Amazon said it would be adding lockers for package pickups in store. It is unclear if the lockers will be used for food orders.

Still, the higher prices charged by Whole Foods for its organic store goods could limit sales on a mass market platform such as Amazon, analysts say. Whole Foods diapers, sandwich bags and other dry goods that drive its private-label sales will also compete with Amazon's own private labels and other cheaper offerings.

Analysts say that adding Whole Foods private labels will help Amazon quickly track product data online that is harder to obtain in stores, helping it identify how its new pricing changes and offerings are taking effect.

"This is a great social experiment from a data perspective," says Mike Kim, a director at data performance consultancy AArete.

Write to Laura Stevens at laura.stevens@wsj.com and Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

August 30, 2017 05:44 ET (09:44 GMT)