Amazon’s competitors better watch out.
By next year, the tech giant is already poised to account for about half of all US e-commerce sales, according to Daniel Ives of GBH Insights. But its acquisition last year of Whole Foods and the steps it’s taking to cross-promote the high-end grocery chain with members of its Prime service, will likely only further boost its retail business, Ives believes.
In the short term, the investments Amazon’s making in Whole Foods and other parts of its business may depress its profits, but in the not-too-distant future, they’re likely to create a “flywheel effect” that speeds up sales in various parts of its operations, Ives said.
“With a major overlap between Whole Foods shoppers and Prime members there is ‘golden opportunity’ in our opinion to use both these distribution channels to catalyze higher grocery … and retail sales among members, while driving non-Prime members that are Whole Foods shoppers into Prime members in the near-term,” Ives said in a research note issued Monday. “This is part of the broader consumer flywheel strategy … that will enable Amazon to become further entrenched in the daily lifestyle and spend cycle of consumers worldwide.”
The strategy already seems to be paying off. When Amazon reports its second-quarter results later this month, Ives expects the company’s North American retail business to post stronger sales than Wall Street has been forecasting. The company will likely respond to those results by offering better-than-expected earnings guidance for its third quarter, he said.
With that kind of bullish outlook, Ives raised his price target on Amazon’s shares to $2,000 from the $1,850 target he had previously. Should the company hit that target, its market capitalization would be within spitting distance of $1 trillion, a level Ives had previously predicted Amazon would be the first public company to hit.
“While a trillion-dollar market cap will not happen overnight, we believe the path is now set for this to occur over the next 12 to 18 months,” he said. He continued: ‘Amazon remains a “green light’ name to own at these levels in our opinion.”
Long the iconic online retail company, Amazon made its first major foray into brick-and-mortar sales when it purchased Whole Foods. The company has been widely expected to use Whole Foods to promote its online retail business and vice versa.
In recent months, Amazon has been taken the steps to do just that. It’s set up lockers in some Whole Foods stores where Amazon customers can pick up packages they’ve ordered and drop off returns. Prime members in some areas can order groceries from Whole Foods and have them delivered within two hours. And now Whole Foods is offering extra discounts on certain items for Prime members.
Those steps are likely just the first of many more to come, Ives said. The increasing ties between Whole Foods and Amazon’s online store are likely to not only boost sales at both, but also to make it harder for rivals to compete, he said. The moves are likely to encourage Whole Foods members to get a Prime membership if they don’t have one already and Prime members to shop at Whole Foods.
“Prime growth remains the key jewel for Amazon going forward,” Ives said. He continued: “Putting up more walls [or] barriers around its growing Prime competitive moat is a major ingredient in Amazon’s ability to fend off competition.”
In recent trading Amazon’s shares were up $19.06, or about 1%, to $1729.69.
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