The deal is an aggressive move into the grocery store space, where Walmart (WMT) is the leader. However, Whole Foods caters to the higher-end customers who might not necessarily be going out of their ways to seek the lower-priced deals offered by Walmart.
“[B]ut if the goal is to fully compete against Walmart (and the low-end), then could Dollar General (DG) be next on Amazon’s buying list to go after an arguably larger part of the U.S. population?” asked analyst Charles Grom of Gordon Haskett in a note out on Friday.
Grom noted that the Whole Foods deal “gives CEO Jeff Bezos a weapon to attract a customer he largely already caters to,” alluding to the fact that more than 70% of households with incomes of over $112,000 have Amazon Prime subscriptions.
In the note, Grom and his team discuss how dollar stores, which also include Dollar Tree (DLTR), compete for different business from Amazon’s latest acquisition, Whole Foods.
Both Dollar Tree and Dollar General attract lower-income households outside cities; that could ultimately benefit Amazon by catering to a demographic it’s just beginning to attract. Moreover, consumers head to dollar stores’ brick-and-mortar locations for their immediate, everyday needs — meaning those stores might not be as vulnerable to online competition, the note added.
The mega-deal with Whole Foods, on the other hand, enables Amazon to serve basically the same high-end customers it already reaches. With products having a higher price point, Whole Foods attracts higher-income households (earning it the nickname “Whole Paycheck.”) Also, store Amazon has a population-density requirement, meaning that it typically doesn’t serve people in rural areas that the dollar stores could reach.
Buying one of these dollar stores could also fit into Amazon’s previous attempts to reach a lower-income demographic.
Yahoo Finance’s Melody Hahm has previously reported on Amazon’s move to give a 45% discount on its Prime membership for those on food stamps. This move aimed to gain interest from the 45 million people who are eligible for the discounted membership and might have been put off by the price of Amazon Prime.
On Friday, both Dollar Tree and Dollar General were down more than 3% at the market close after the news of the Amazon deal.