Amazon.com Swipes at Walmart With Discounted Prime for Medicaid Recipients

MarketsMotley Fool

Walmart (NYSE: WMT) has proven its ability to attract low-income consumers. But as Amazon.com (NASDAQ: AMZN) has largely tapped out the market of wealthier households, it realizes that, to continue growing, it needs to expand at the other end of the income scale.

The e-commerce site has been working to make its Prime membership program more affordable for low-income households, and its latest discounted-fee program for Medicaid recipients may be the sharpest blow yet it has struck against its retail rival.

Continue Reading Below

Reaching out to those who can least afford it

Amazon recently unveiled a new cut-rate Prime price for Medicaid recipients, allowing them to receive benefits including two-day free shipping, streaming video and music, and unlimited photo storage for just $5.99 per month after a 30-day free-trial period.

That's the same discount Amazon began offering last year to individuals on government assistance who have an Electronic Benefits Transfer card, and follows the monthly payment plan it introduced two years ago. Offering a monthly Prime plan instead of an up-front annual fee was seen as a way to make it cheaper for individuals who might not be able to come up with the $99 annual fee all at once.

It may be working. According to a study by R.W. Baird, Prime membership growth has been strongest among households making less than $50,000 annually. But earlier this year, Amazon raised the monthly payment plan fee from $10.99 to $12.99, meaning the annual cost of a Prime membership rose from $132 to $156, an 18% hike. However, the monthly plan became 57% more expensive than the standard $99 annual membership fee, which Amazon didn't raise.

A prime opportunity for expansion

The battle for low-income consumers is intense. Although Amazon is estimated to be in some 100 million U.S. households, most of them are thought to be higher-income. A Piper Jaffray survey found that 82% of households earning $112,000 or more were Prime members, while those earning less than $41,000 comprised the smallest percentage of Prime members, despite the growing popularity of the monthly subscription plan among lower-income households.

Walmart, on the other hand, derives more than half of its revenue from food, and in 2013, the last time the figure was revealed, reportedly received 18% of all food stamps spending. That equated to about $14 billion, or 4%, of Walmart's U.S. revenue at the time.

The Agriculture Department says there are 21.5 million households enrolled in the food stamps program, equaling some 43.6 million people. On average, they receive $278.51 per household, or $136.85 per person. Last year, program benefits totaled $63.7 billion.

That means there are some large dollar amounts floating around that Amazon.com wants to capture, and by making the Prime program more affordable to those receiving government assistance, it can lure more spending its way. Last year Amazon started accepting food stamps as payment on qualifying items, as did several of its competitors.

But it's hardly a welcome development for Walmart, particularly now as it is fighting a war on several fronts. Beyond Amazon, it also faces increased competition from deep-discount chains Lidl and Aldi, which is aggressively expanding its footprint in the U.S.

The Prime program is one of Amazon.com's three foundational blocks, along with its Marketplace and its Web Services. Now as it pushes into the healthcare industry, it may be able to use its Prime membership program to peel off even more customers from Walmart. Medicaid is the program that provides health coverage for low-income families, and getting people covered by the program into the Prime ecosystem could allow them to ease into Amazon's own healthcare initiatives.

Find out why Amazon is one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)

Tom and David just revealed their ten top stock picks for investors to buy right now. Amazon is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of March 5, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.