Amazon has been erasing billions from its rivals' valuations in the weeks since its acquired Whole Foods. Investors have shed their investments in other grocery stores as they wait to see how Amazon will modernize its new grocery holding.
But the best weapon in Amazon's arsenal isn't robot cashiers, drones or machine learning — it's Amazon Prime.
"We believe 80% (38 million) of current US Prime members do not shop at Whole Foods," Brian Nowak, an analyst at Morgan Stanley, said in a recent note. "In this case convenience will likely be the cure, as we expect Amazon to integrate the 1-2 hour Prime Now offering into Whole Foods."
Prime has been Amazon's biggest advantage in the online retail space. Prime customers spend more money and make more purchases than Amazon's non-Prime customers, and Amazon is constantly adding new features to the service. Amazon is the first choice retailer for 93% of Americans, according to a recent survey done by RBC.
So after the company makes its initial price cuts at Whole Foods, it's going to start integrating its secret-weapon Prime service into the grocer, Nowak said. He thinks integrating Prime will drive one-third of Whole Food's total future growth.
Nowak's model has Whole Foods growing its revenue at a 12% compounded annual growth rate through 2022. Some of this could come from Amazon using Whole Foods to ramp up its Prime Now product, which allows customers to shop online for items to be delivered in hours instead of days.
The main Prime Now landing page on Amazon's site already features a Whole Foods banner prompting users to explore the offerings now available because of the acquisition. The ad says that Amazon is adding new products weekly from Whole Foods.
Nowak says that Prime Now can operate at around a 6% gross profit margin at scale. It will cost Amazon about $75 million over three years to fully implement Prime Now in its stores.
Despite his expected ramp-up of Prime, Nowak doesn't see Amazon investing in machine vision in the near term. This type of technology would enable checkout-less shopping similar to Amazon's "Go" test store.
Overall, Nowak predicts $100-$300 million in operating profits per year thanks to Amazon's improvements. Amazon is up 31.47% so far this year.
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