Whole Foods isn’t priming Amazon’s pump – MarketWatch

Amazon.com Inc. has touted its big deal for Whole Foods Market Inc. as a way to use physical retail to grow its business, but after its first full year owning the grocery chain, it’s not growing at typical Amazonian levels.

On Thursday, the e-commerce giant reported record-breaking results for the holiday season, but its stock sagged as its outlook disappointed, along with plans to increase investments in 2019 from 2018 levels. Shares were off nearly 5% in after-hours trading.

The fourth quarter of 2017 provided the first legitimate year-over-year comparison for Whole Foods within Amazon. The results weren’t great. Amazon said that revenue for its physical stores — made up of Whole Foods and other efforts such as Amazon Go and its holiday pop-up stores — totalled $4.4 billion, 3% less than physical-store sales a year ago, before many of Amazon’s other brick-and-mortar experiments launched.

Read more about Amazon’s $13.7 billion deal to buy Whole Foods in June 2017.

Amazon’s Chief Financial Office Brian Olsavsky noted on the call that the year-ago period for Whole Foods had five extra days in the quarter, as its fiscal calendar was adjusted to match Amazon’s. He also noted that online Prime Go orders of Whole Foods groceries that are picked up at the store are counted as online sales instead of physical retail.

“The Whole Foods growth year-over-year on an apples-to-apples basis was approximately 6%,” Olsavsky said, though Amazon did not provide the actual numbers to support or check their math.

During the fourth quarter, total online sales at Amazon increased 13%. Amazon Web Services revenue grew 45%. Sales of advertising and other services increased 95%, which was actually lower than in previous quarters.

Read more about Amazon’s push into ecommerce ads.

No matter how Amazon tries to spin the numbers, its foray into the land of brick-and-mortar retail is not that impressive compared with its other businesses. Amazon has been gradually lowering some prices at Whole Foods, to help combat the higher-end grocery store’s reputation as “Whole Paycheck,” but according to recent research, notable price drops have not yet arrived.

“I was concerned that pricing actually hadn’t come down as much as promised and that competition was taking customer wallet share while employees seemed increasingly dissatisfied or disgruntled,” said Daniel Kurnos, an analyst at Benchmark. “I do, however, think physical retail makes sense, as does Whole Foods for data collection, Prime adoption and order frequency, but it may be a low-growth business for them rather than an arm they can accelerate.”

Before Amazon’s results, Kurnos said in a note he expects Amazon’s physical stores to grow at a rate of 5% to a total of $18.45 billion in 2019 and another 5% in 2020 to $19.37 billion. He estimated Amazon’s overall revenue growth rate for 2019 at roughly 20.6%.

Since Amazon took over the chain, Whole Foods co-founder John Mackey told employees in a video in November that sales have reversed course and grown, according to the Wall Street Journal. But sales growth at physical retail stores is paltry when compared with e-commerce growth, and Amazon only has itself to thank for that phenomenon.

Whole Foods is going to be a squishy growth contributor, at best, to the larger Amazon landscape, and at worst, a potential profit drag. Until Amazon is able to further cut prices to help generate more volume and add more actual stores, it may stay that way.

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