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The Whole Foods Purchase Finally Starts Adding Value to Amazon Stock

Dana Blankenhorn

What makes Amazon (NASDAQ:AMZN) the greatest retailer ever is that it knows who its target should be. It also is what makes Amazon stock one of the most solid bets you can make.

Take Whole Foods. On the surface, the deal made no sense to me. Amazon paid $13.7 billion for Whole Foods last year, at a time when the grocer had sales of $16 billion. Amazon could have had Kroger Co. (NYSE:KR), with sales of over $100 billion, for $25 billion.

But it turns out Amazon knew who it was targeting.

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Amazon was targeting Costco Wholesale Corp. (NASDAQ:COST). In the last year it has transformed Whole Foods into a Prime membership store.

Prime membership costs $120 per year, and includes free streaming media and shipping, along with these discounts. A Costco executive membership costs $110 per year.

Prime, Costco and Amazon Stock

Both Amazon and Costco are aiming at the same demographic, the upper middle-class. The difference between Whole Foods and Kroger is that Whole Foods stores are located where these target customers live, while Kroger aims at the broader market.

Costco also sites its stores where these higher-value shoppers live. It can cost $100 million for Costco to set up a store. It must be careful. It studies demographics closely before investing, following its market.

There are currently 479 Whole Foods outlets in the U.S., and about 500 Costcos. Whole Foods outlets are smaller, however, often located right inside wealthy zip codes, while Costcos are often at freeway intersections.

Thus, Costco appeals to families, Whole Foods to singles and couples without children. The demographics are the same, the family dynamics are different.

By bringing Prime discounts to Whole Foods and expanding delivery, Amazon can capture Costco customers once the kids have moved on. This is a huge change for Whole Foods, which formerly focused on young couples seeking convenience and organic produce.

The tale of this competition will be told in membership numbers. Costco currently has about 90 million members. Amazon Prime has 90 million members in the U.S. That’s the baseline.

Walmart Misses the Point

All this is going right over the heads of Walmart Inc. (NYSE:WMT) in Arkansas.

As I have written several times here, Walmart considers Amazon the way Captain Ahab considered Moby Dick. It is entirely focused on the Amazon competition, selling physical stores and buying online operations to keep up.

The whale is getting away. Walmart was forced to admit in its Christmas quarter report that its online sales are growing more slowly than Amazon’s. They had been growing faster, because the numbers were smaller.

But while it has been chasing Amazon, Walmart is getting killed by Costco. Walmart had to close 63 of its Sam’s Club warehouses in January, warehouses that compete directly with Costco, killing the goodwill it was due to gain from giving employees’ raises.

The Bottom Line on Amazon Stock

Walmart should be the prime advocate for the American middle-class. That’s who shops there. That is its niche. Instead it keeps chasing Amazon for the business of upper middle-class consumers and keeps getting killed by Costco.

There are reasons other than retail for Amazon stock realizing a 44% price gain so far in 2018. It is winning in cloud services, it is winning in artificial intelligence with its Alexa voice system, and it is growing internationally in ways other companies can only dream of.

But Amazon also knows whose market it’s aiming for, and how to grab a piece of it. Walmart has shown it doesn’t know who threatens it, or indeed how to respond. As always, Amazon stock is the better buy.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.

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