Amazon (NASDAQ: AMZN) has packed Prime full of new benefits year after year. What started an unlimited two-day shipping program has quickly expanded into video and music streaming, digital photo storage, free ebooks and magazines, and exclusive access to certain products on Amazon's marketplace, among other things. Amazon is about to add yet another reason to become a Prime member.
Following the close of its Whole Foods Market (NASDAQ: WFM) acquisition -- scheduled for August 28 -- Prime will become the customer rewards program at the grocery chain. In a press release announcing the closing date, Amazon said, "Prime members will receive special savings and in-store benefits."
It's not a real surprise that Amazon is working to integrate Prime with Whole Foods. Prime has become one of the pillars of Amazon's business. With around 80 million Prime members in the U.S., it could help Whole Foods take a larger share of the grocery market.
Shedding "Whole Paycheck"
Whole Foods has already taken several steps in recent years to shed its reputation for high prices. Its private label, 365 Everyday Value, has been a great success, so much so that Whole Foods launched a new store format based on the label last year. The new stores go head to head with Trader Joe's, which is also centered around private-label products.
Still, there's room to trim the fat. Whole Foods generated a gross margin of 34.4% last year and an operating margin of 5.5%. Kroger's (NYSE: KR) gross margin was just 22.4% and its operating margin was just 3%. And Amazon's North American retail segment produced an operating margin of just 2.2% last year.
Amazon has already announced plans to cut prices on certain goods for all Whole Foods shoppers. Eventually, Prime members will get an additional discount once the program is integrated with Whole Food's point-of-sale system. Amazon's penchant for extremely thin margins should help further debunk the "Whole Paycheck" reputation.
Making shoppers loyal
Amazon has many strengths, and shopper loyalty is one of its biggest. Shoppers keep coming back to Amazon because it's focused on giving the customer a great experience, and it sounds like Amazon will extend that philosophy to Whole Foods stores.
On top of additional discounts and coupons, Prime members will also be treated to in-store benefits. What exactly that means is unclear, but it indicates a heightened focus on the customer experience in stores for Prime members.
Whole Foods has been testing its own rewards program in Dallas and Philadelphia for some time, but Prime brings instant scale. Amazon ought to be able to experiment more with rewards and discounts to see what drives the most grocery sales. It also has a whole trove of additional shopping data it can use to target Prime members with offers and drive them back to Whole Foods week after week.
Whole Foods pushing Amazon into groceries
Amazon has been slowing getting into groceries for more than a decade. Prime members get access to Prime Pantry, which offers shelf-stable grocery staples, and members in select cities can subscribe to AmazonFresh, its same-day fresh grocery delivery service. Amazon will add Whole Foods' private labels to all of its grocery services after the acquisition closes.
But Whole Foods also provides Amazon with over 400 stores from which to source deliveries, which could enable it to scale its AmazonFresh business. Amazon could also use Whole Foods stores to establish an online order and pickup service for groceries, which wouldn't require an additional subscription.
Integrating Prime with Whole Foods is just the first step for Amazon in groceries. Integrating Whole Foods into the rest of Amazon is the bigger opportunity.
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John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool owns shares of Whole Foods Market. The Motley Fool has a disclosure policy.