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  1. Home
  2. / Investing
  3. / Technology

Amazon's Reported Grocery Plans Should Worry Walmart and Kroger - Tech Check

Compared with Whole Foods, whose average shopper is relatively wealthy, the new grocery store chain Amazon is reportedly planning will feature lower prices.
By ERIC JHONSA
Mar 1, 2019 Updated Mar 01, 2019 | 08:37 PM EST
Stocks quotes in this article: NFLX, AMZN, DIS, KR, WMT

Amazon's Reported Grocery Plans Should Worry Walmart and Kroger

Though building them out will take time, Amazon.com's (AMZN) reported plans to build a new line of grocery stores could eventually be a bigger problem for big-box retailers and traditional supermarket chains than its purchase of Whole Foods.

The Wall Street Journal reports that Jeff Bezos' firm plans to "open dozens of grocery stores in several major U.S. cities" that would be separate from its Whole Foods stores. A Los Angeles store could reportedly open by year's end, and talks are said to be underway for opening stores "in shopping centers in San Francisco, Seattle, Chicago, Washington, D.C., and Philadelphia."

Notably, sources state the grocery stores aren't meant to directly compete with Whole Foods, which (although having seen price cuts since Amazon bought it in 2017) caters on the whole to more affluent consumers, but will instead "offer products at a lower price point." In addition, Amazon is said to be thinking about buying "regional grocery chains with about a dozen stores under operation" to expand its new supermarket brand's reach.

The Journal says it's "unclear" whether the stores will -- like Amazon's Go convenience stores -- support cashier-free checkouts. Supporting the technology, which relies on cameras, sensors and machine learning algorithms, would be tougher in a larger store. However, Amazon has reportedly been testing out such a use case.

Merely opening "dozens" of stores is unlikely to put a major dent in the top line of a company like Walmart (WMT) , which reports having over 4,700 Walmart-branded stores in the U.S., or Kroger (KR) , which had close to 2,800 stores as of a year ago. But assuming Amazon is serious about building a nationwide supermarket chain, its efforts could easily become a headache for such companies in time.

In addition to driving offline grocery sales among more cost-sensitive consumers, creating a new grocery store chain could be useful in a few other ways. Specifically:

  1. It would help Amazon grow its online grocery delivery and pickup businesses. Many Whole Foods stores now support in-store pickup for online orders and/or free 2-hour deliveries ($35 minimum) via Amazon's Prime Now service, and it's likely that the new grocery store chain would do the same. This would clearly be a problem for Walmart, given that online grocery orders appear to account for much of its e-commerce business.
  2. It would increase Amazon's grocery purchasing power, which in turn would give it more leverage to seek discounts from major grocery suppliers for both online and offline sales.
  3. Assuming that (as is now the case for Whole Foods) Amazon Prime acts as the loyalty program for the grocery chain, it could help grow Prime sign-ups among lower-income consumers, a demographic for which Prime penetration rates are relatively low. In 2017, Amazon began charging just $5.99 per month for Prime subscriptions to consumers using food stamps and other government-assistance programs.
  4. The stores could be leveraged by Amazon's non-grocery businesses. Among other things, they could host order pickup lockers, act as showrooms for Amazon-branded hardware and -- in the wake of last year's acquisition of online pharmacy PillPack -- contain pharmacies.

Amazon, it's worth adding, is also busy expanding Whole Foods' U.S. store count, which for the moment is below 500. With the percentage of U.S. grocery sales estimated to have moved online still easily in the single digits, and with many of those grocery sales involving items that feature high shipping costs or need to be frozen or refrigerated, there's plenty of logic to creating a larger grocery store footprint.


Netflix Doesn't Seem to Be Done Flexing its Pricing Power

March 1, 2019 | 1:27 PM EST

Six weeks ago, Netflix (NFLX)  announced it's  hiking prices for all three of its U.S. streaming plans. Nonetheless, a few days later, the company forecast it would add 1.6 million paid U.S. streaming subscribers in Q1 to a domestic base that's already above 58 million, after adding 1.53 million U.S. paid subs in Q4.

Netflix's apparent success at passing on a U.S. price hike without seeing a major backlash could be emboldening it to prep European price hikes. Recently, Netflix was spotted carrying out a pair of price-hike tests on its Italian sign-up page.

One test involves keeping the price of Netflix's Base plan (it supports one non-HD stream at any given time) at €7.99/month, but raising the price of its Standard plan (two simultaneous HD streams) by €2 to €12.99/month, and the price of its Premium plan (four HD or 4K streams) by €4 to €17.99/month. Another involves raising prices for the Base, Standard and Premium plans by €1, €2 and €3, respectively.

There's no guarantee that Netflix will go through with either of the price hikes being tested. Last summer, the company tested a European pricing overhaul under which it would cut the number of streams supported by its Standard and Premium plans in half and introduce an Ultra plan that costs €17/month and supports four streams. However, the overhaul, which would have cut down on password-sharing, was never implemented.

Nonetheless, given that Netflix just hiked its U.S. prices, and has also recently hiked prices in other developed markets such as Japan and Canada, the timing seems right for European price hikes. Though the fact that pay-TV prices are lower on average in Europe than in the U.S., where Netflix arguably remains a huge bargain relative to pay-TV, could make the company a little more careful over the long run about how it hikes prices on the continent. However, for now, the company still appears to have a decent amount of room to raise prices in EU markets, particularly given that its customer satisfaction scores in large European markets are (as is the case in the U.S.) quite high.

European price hikes would provide Reed Hastings' firm with additional funds to spend on content as Amazon.com  (AMZN) continues investing heavily in Prime Video and Disney (DIS)  gets set to launch its Disney+ service. Netflix's cash content spend rose to around $13 billion last year, and -- judging by management's spending commentary as well as Netflix's guidance for 2019 cash burn to be similar to a 2018 level of $3 billion in spite of strong revenue growth -- is likely to grow meaningfully again this year.

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TAGS: Investing | Technology

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