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How Whole Foods Gives Amazon a Boost

For a highly complex company,

Amazon.com


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has a very simple view of the world: There is the money consumers spend on Amazon, and the money they spend not on Amazon.

Food and beverages, which account for one-fifth of the money Americans spend on goods, may be the biggest category of spending that is largely not done on Amazon. The Whole Foods deal announced a year ago was meant to change that.

But to say Amazon was only interested in taking a chunk of the $1 trillion Americans spend on food and beverages every year is to underestimate the company. Since the deal, Amazon has made the obvious moves, such as cutting prices and using the Whole Foods network of stores to ramp up its online grocery business.

More importantly, Amazon is using Whole Foods to draw more customers more deeply into its ecosystem. This means giving people more reasons to pay for Prime and buy Amazon devices, which make them spend more on Amazon. In addition to offering Prime members free two-hour delivery for Whole Foods orders over $35 in a number of cities, Amazon also is giving them 10% discounts on sale items at the chain, plus exclusive weekly discounts. Customers who use Prime’s Visa card get 5% back on Whole Foods purchases.

Trouble in Aisle 7

This column is Part 5 of a Heard on the Street series on the struggling food industry.

Prime members who don’t frequent Whole Foods have reasons to shop there more regularly. That will not only drive sales on both platforms but also ease moves into new areas, such as a pharmacy business.

Amazon hasn’t detailed its expansion plans for Whole Foods, but if the aim is to pull customers into the Prime ecosystem, it would make sense for it to add to Whole Foods’ current 484 stores. There are 38 Whole Foods stores and smaller-format 365 stores under construction, according to location analytics company Beitz and Daigh Geographics. That pipeline could grow a lot over the next couple of years. Based on his conversations with real estate contacts, Wolfe Research analyst Scott Mushkin says Amazon could be aiming for as many as 1,500 locations in the U.S.

Will Amazon succeed? For its competitors in the grocery business, to some extent it doesn’t matter. The online giant has dragged them into a costly competition for market share that, win or lose, could leave them damaged. It’s Amazon’s world, and now they get to live in it.

Write to Justin Lahart at justin.lahart@wsj.com

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