Amazon Making Inroads Into Wal-Mart’s Territory

Amazon (NASDAQ:AMZN) has a dominant market position in the e-commerce industry in North America, and is gradually becoming a much bigger threat to traditional retailers than previously anticipated. Amazon is rapidly adding customers from lower- and middle-income households in the U.S. to its Prime offering, thus threatening Wal-Mart’s core customer base. Amazon currently has around 60-65 million households as Prime customers in the U.S., per estimates by Piper Jaffray. ^[1]

Per a survey conducted by consulting firm Kantar Retail in 2015, Wal-Mart’s typical customer is a white, 50-year-old woman with an annual household income of around $53,000 while Amazon’s typical customer is younger and wealthier. Per Piper Jaffray, 75% of households making over $112,000 were Prime customers by the fall of 2016 compared to about 50% of households with average annual incomes between $21,000 and $68,000. Interestingly, the income group that showed the sharpest penetration increase was households making $68,000 to $112,000 a year. ^{[1] [2]}

A note published by Cowen & Co. last year reported that Amazon Prime had increased its household penetration in the U.S. from 20% in August 2013 to 44% in August 2016, close to Wal-Mart’s household penetration in the U.S. and surpassing Costco and Sam’s Club’s relatively flat penetration rate of around 30% each. Amazon has taken several initiatives to attract lower-income and middle-income households into the Prime membership fold in the last couple of quarters.((Wall Street warms to Wal-Mart’s shift to e-commerce, RetailDive.com, Oct 11 2016)) Some of them are detailed below:

• Amazon Go: Amazon recently introduced “Amazon Go”, a retail store format which allows shoppers to pick the items they want and leave without any checkout procedure. This format will provide some of the convenience of e-commerce to consumers who prefer to pick out grocery items personally, which would give Amazon a substantial competitive edge over other players such as Wal-Mart and Target. Amazon’s market share in the  grocery segment is only around 1% currently, while groceries account for nearly 20% of consumer spending in the U.S. According to the Food Marketing Institute, the average U.S. consumer spends nearly $107 per week on grocery shopping, or around $5,500 per year, higher than the annual spend of an average Amazon Prime customer. The company has opened the first Amazon Go store in beta to employees, and will open it to the public in 2017. (Also read Here’s How Amazon Go Can Be The Next Growth Driver For Amazon)
• Prime Rewards Visa Card: Amazon recently launched a new Prime Rewards Visa Card which will give its Prime customers a 5% discount on all their purchases on Amazon.  Additionally, customers will also get rewards at other places where they shop using this card including restaurants, gas stations and drugstores. With no annual fee and other benefits such as no foreign transaction fees and travel protection, this card is likely to delight Amazon’s existing Prime customers and attract more Prime members.While Amazon Prime members can already earn a 5% discount through its store card issued by Synchrony, the new card is a Visa card which can be used anywhere. According to a note published by Consumer Intelligence Research Partners (CIRP), customers owning Amazon credit cards spend the highest on its platform. Their average annual expenditure exceeds that of Amazon Prime members by 16%. An attractive rewards based credit card should work as an incentive to make its existing customers spend more on its platform and attract new customers.
• Amazon Prime Dash Virtual Buttons: Amazon launched physical buttons called Dash, which one could attach to walls, fridges and the like, in July 2015 to help customers order certain necessities such as paper towels or detergent faster. They were initially priced at $4.99 but their price was cut to 99 cents in 2016 as Amazon realized that customers owning such buttons were likely to order more frequently, thus easily compensating for the cost of the button.Now, Amazon has also launched a free virtual Dash button on their website and app to help Prime customers order their frequent requirements faster online. This should help the company generate even greater revenue per customer from Prime users, especially for fast moving consumer products which many customers still prefer to buy in bulk from traditional retailers. ^[3]

Why Prime Matters

Amazon’s Prime Members spend more than twice as much on Amazon than non-members and are generally more loyal (95% retention rate), according to an analysis from Consumer Intelligence Research Partners. Given this favorable spending trend, Amazon is focused on retaining its existing Prime Members and growing this base. Offering conveniences such as free shipping, free photo storage and access to a large on-demand video and music library are ways in which Amazon is able to attract members.

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1. Rich-people-love-Amazon-Prime, Business Insider, Oct 14 2016 [↩] [↩]
2. Meet the average Wal-Mart shopper, Business Insider, June 18 2015 [↩]
3. Amazon Prime Dash Buttons go virtual, Jan 20 2017 [↩]