Grocery stores have been a low margin retail business since industrialization. But Amazon didn’t decide to drop $13.7 billion to acquire Whole Foods on Market Friday to improve the struggling fancy food seller’s performance within the traditional model. Just as it has with entertainment, Amazon threatens to use its army of loyal subscribers to literally upset its rivals’ apple carts.
The Food Marketing Institute, a trade group that represents food retailers, says the average grocery store makes a net profit margin of 1.7 percent. Even Whole Foods, whose premium pricing has become an unintentional part of its brand (who among us hasn’t spent $13.7 billion at Whole Foods) reported a 2.7 percent net profit margin during its last quarter.
But Amazon didn’t jump into the grocery business with both feet to make money by ordering a pound of apples for $1 and selling it for $1.30 — just like it’s not in the entertainment business necessarily to turn individual profits on the films it buys, and original series it green-lights (although that would be a bonus). It’s all about adding more subscribers to its Prime membership program and getting them into its ecosystem for the next 20 years, which is a completely different game from what its competitors in entertainment — and now groceries — are playing.
Jeff Bezos’ e-commerce behemoth didn’t pay $10 million for “Manchester by the Sea” at the Sundance Film Festival last year intending to earn it back at the box office and through home entertainment sales (even though the film ended up grossing a healthy $62.3 million worldwide). That’s what traditional studios do. Amazon wrote that check because having a movie with plenty of buzz that ended up winning two Oscars made its Prime Video streaming service more compelling.
Prime also includes a lot more than just video content, giving those willing to shell out $10.99 a month or $99 a year for two-day shipping on thousands of items and a music and e-book library in addition to its exclusive films and TV shows. (There’s also an $8.99 a month Prime Video-only membership.)
At this year’s Sundance, Amazon and Netflix — which is playing a similar game to a lesser extent, as its subscription service only includes video — dominated the independent film festival, writing checks traditional studios couldn’t justify. Amazon dropped $12 million on Kumail Nanjiani’s real-life romantic comedy “The Big Sick,” while Netflix splashed $12.5 million on Dee Rees’ “Mudbound.” But again, it’s all about growing the subscriber base, not buying a movie for $12 million and hoping to generate some multiple of that on the back end. Studios sell content; Amazon can use content — and now Whole Foods — essentially as marketing for what it’s really selling: Prime.
To commemorate “Manchester by the Sea’s” May 5 debut on Prime Video — and make clear why it acquired the movie — Amazon gave everyone in the real town of Manchester-by-the-Sea, Mass., a year of free Prime. As many Prime subscribers know, once you can get pretty much anything you want delivered to your house for free in two days, going to the store just seems like a huge inconvenience. And if that service comes with great movies and award-winning TV — while your cable bill keeps going up — soon Prime Video becomes an adequate replacement for traditional prime time television, which is already happening as internet-native millennials (and other people simply frustrated with pay-TV) continue to cut the cord.
Maybe in the near future, it might also include locally-sourced organic produce delivered within hours from your neighborhood Whole Foods, which makes that subscription that much easier to justify. And dinner time becomes Prime time, too.