Could Whole Foods Become Cheaper Than Traditional Grocery Store Shopping?

Amazon.com, Inc. (NASDAQ: AMZN) Prime shoppers can soon apply a 10-percent discount to already discounted products at Whole Foods, CNBC reported Tuesday.

Coupled with free deliveries and 5-percent cash back on in-store Amazon Visa charges, this cut could ultimately make Whole Foods a more competitive grocery alternative — and Prime a more profitable purchase.

The Rating

Morgan Stanley analysts Brian Nowak, Vincent Sinisi and Jonathan Lanterman maintained an Overweight rating on Amazon with a $1,700 price target.

The Thesis

The analysts estimate only 62 percent of Whole Foods shoppers are Prime members, and CNBC reported a 75-percent overlap. As Amazon’s subscription growth begins to slow, capturing the rest of the Whole Foods crowd could prove meaningful.

Incremental price cuts may ultimately make Whole Foods cheaper than traditional grocers, and considering U.S. households spend an average $6,000 per year on groceries, the savings “can go a long way toward justifying Prime membership...even at $120 per year,” the Morgan Stanley analysts wrote in a note.

The pricing strategy has proven effective. Amazon already slashed Whole Foods average prices about 5 percent year-over-year so that, meat excluded, the basket trades at a mere 6-percent premium to conventional rivals.

“These reductions have been important to driving traffic and changing Whole Foods perception,” Morgan Stanley wrote, noting that 70 percent of non-customers cite high prices.

Price Action

At time of publication, Amazon shares were trading around $1,579.

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