The charge will impact Prime members who previously got free delivery.
September 29, 2021
Amazon (NASDAQ: AMZN) has added a lot of perks for Prime members beyond the original promise of free, two-day delivery. Now, the company has actually decided to take a perk away. As of October 25, the retail giant will begin charging $9.95 for Whole Foods delivery, which was previously free for Prime members.
It’s hard to imagine that the company’s members who previously used that perk will be too thrilled and some of them may use other delivery services that either cost less or are free. That might cause Whole Foods to lose some sales, but it’s not likely to cause many people to cancel their Prime memberships. That’s likely because — no matter what perks Amazon adds — people still join largely for the shipping perk.
Amazon has said it has made the move in order to not have to raise prices on the actual items being delivered. The reality is that delivery is not free. It’s labor-intensive and while some automation will eventually come into play when it comes to order picking, doing the actual delivery means a person and a vehicle.
It’s possible that Amazon’s move signals a change in the overall delivery business where prices will slowly tick up. Food delivery services have been adding surcharges for some deliveries while using “free” as a way to entice people to order from certain restaurants. It’s a complicated puzzle where Amazon can afford to move first while other delivery players — at least the ones that don’t own giant retail operations — cannot afford to do the same.
Is Amazon part of a new trend or is it just eliminating a cost that doesn’t bring it new members or enough goodwill to be worth the expense. Steve Symington joined Dan Kline on the Sept. 27 edition of “7investing Now” to discuss whether Amazon’s move will hurt it and what it means for the rest of the delivery market.
A full transcript follows the video.
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Dan Kline: With that, Steve, we’re gonna move on we’re gonna switch chairs. I know I talked a little bit more here than I normally do. We kind of did a show a little more geared towards me, then towards you. We’re gonna talk about the new Amazon price hike in a moment. But before we do that, Steve, we are rocketing towards the first of October that is preposterous to me. My anniversary happens late September. My wife’s birthday is October 8, mine is October 16. You could send me presents if you want but please don’t. But that being said, it feels to me like it’s July but now it’s October. But what happens on October 1, because you and I that’s a very big day for the two of us.
Steve Symington 19:18 Yeah. New recommendations every single month. We released seven recs one from each of our lead advisors. We call those our best single stock ideas at that time. Every single month, first of the month they released and that’s that’s a fun time of the month so always ends up being pretty busy because we filled a lot of questions about those from our members in the inbox and we’re just excited to release our newest ideas.
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Dan Kline 20:38 We are not going to belabor that you have been quiet out there at 7Investing nation. So feel free to weigh in on the program. We’re gonna switch gears a little bit here. So here, Steve, here’s what’s happening. And this may be more relevant to me than you do have a Whole Foods anywhere near you. Is that a thing in Missoula, Montana?
Steve Symington 20:54 No yeah, lots of local organic grocery stores that are very Whole Foods-esque, but no Whole Foods nearby.
Dan Kline 21:01 So Amazon (NASDAQ: AMZN) as of October 25, is adding a $10 charge for Whole Foods delivery orders. Previously, if you were a Prime member, you got Whole Foods delivery for free. And Steve, this was something I took advantage of maybe twice a week because Amazon does a really good job and packaging it in these sort of like nice bags that keep the cold in.
So it’s like a show runs long or the order comes early. Like my fish or meat or whatever I ordered doesn’t go bad. And you only have to place a $35 order. And when I saw that this was happening, even though it’s not happing to the 25th. I needed some stuff for dinner tonight. And I just ordered through Instacart because they’re going to be charging $10 per order up from zero. And this is one of those things where we’re going to switch seats a little bit Steve’s going to take over as hosts and ask me some questions because this is a little bit more wheelhouse. And of course, we would love your questions as well.
Steve Symington 21:55 Yeah. So I guess the first thing that comes to mind is it raises the question is this good for rivals, you know that that’s what I’d really be interested to know.
Dan Kline 22:05 So I think it’s good for Instacart I think there’s a lot of people that have Instacart because it gets you your regular grocery store. Here it gets me Publix, it gets you CVS, if you really want it gets you Costco. But for me, I use it for the liquor store, it delivers from a couple delivers from one that sells the Keurig pods which are, it’s pretty far away. So if I need an order those it’s worth it.
But I know with Instacart that not only have I paid $99 a year, but then I’m paying more per item. That’s really obvious what you’re buying just like two bottles of liquor. It’s less obvious when you’re placing like a $60 grocery order. So I do think it will be good for rivals. I think it will be good for the grub hubs and the Uber Eats of the worlds that are moving into grocery. But I’m not entirely sure that Amazon is wrong. And I actually think this might open the window for this.
Dan Kline 22:56 Steve, you and I talked a little bit about before the show. But when you go into Grubhub forgetting all the problems of getting the right order, or your food showing up your order being cancelled, or you thought that you were placing it with the restaurant, and they’re not actually a Grubhub partner, and they’re basically calling the restaurant or forgetting all of that. When you see a delivery fee, does that make you less willing to order on Grubhub?
Steve Symington 23:18 Absolutely. You know, if they tack it on to the items itself, I’m less likely to notice but yeah, the delivery fee, that line gets people.
Dan Kline 23:24 I feel the same way. So for me, if it’s a 4.99 delivery fee, versus a zero delivery fee, it’s gonna really depend what I’m ordering. So like sure if it’s our anniversary, and my wife and I are getting like dinner from Morton’s and it’s already 150 bucks, what do I care if it’s 4.99? But if we’re going to Chili’s and Chili’s is 4.99 and I don’t know, Fridays is free, probably just can order from Fridays like it’s just not that you know. Where Wacky Wings is free, but Super Wings is it’s just not that different. But here’s the reality.
It costs money to deliver. And I actually think this is a case where whether it gets added on sort of clandestinely to the product cost, or it’s just a standard unless you pay an annual fee, every order is 4.99. And certain premium orders are even more, I actually think this is going to be the new normal for all delivery services, because at some point doesn’t and this is going to be true of Uber and Lyft, by the way, as well. At some point doesn’t the cost of delivery of like actually providing the service have to reflect what it costs to do that? It isn’t free to deliver me my dinner.
Steve Symington 24:32 Yeah, so um, but let’s shift a little bit so you think it’s going to help rivals, but maybe the bigger question is will it hurt Amazon?
Dan Kline 24:42 So I do think in the short term, it’s going to hurt Whole Food sales. Because until you start seeing other people do this – now I don’t know what the overlap between people who pay for Instacart so have the impression of free delivery. Don’t think the average person sees that little disclaimer that prices might be higher. And they only might be higher. So you know, grocery stores, you may not notice that. So I do think anyone that has an option, not anyone, but maybe like 60, 70% of people that have the option might go elsewhere.
That being said, Whole Foods is a premium product. And Steve, if you could see how close I lived to Whole Foods, you would find this, I can almost see Whole Foods out my door. If there wasn’t a Target in between us, I’d absolutely be able to see Whole Foods. But we work a long day sometimes. And if I want to cook dinner, I can’t like today I have food in the slow cooker. But I don’t have rolls and I’m gonna make sandwiches tonight. So I placed a $35 order through Instacart. I got some iced coffee and some things I don’t need that I can always have in the house. So yeah, in the short term, I think this hurts Amazon.
But I’m not so sure and if it matters, if your sales go down, let’s say sales go down 5% at Whole Foods, but profitability goes up because they no longer lose money on every order. I also think some of us who are very lazy about this, and I would literally be like, Can I add one more iced coffee to get to $35? Some of us might be like, Okay, I’m paying 10 bucks, maybe I should order my groceries and just spend 150 bucks and get everything I need. So do I think it will hurt? Yes. Do I think it will hurt long term? Probably no. Steve, any thoughts on this? Because it can you deliver? Can you order from any grocery store again, you live in a much more rural area than I am.
Steve Symington 26:28 I can get all the way across town in 15 minutes at pretty much any time of the day. So I’m not too concerned about that. You know, I will order from Costco because the parking situation is not always ideal and it’s never fun to go across town that snag there. But you know, that’s I believe through Instacart anyway. But there’s a great comment from Max Lucas, I’d like to highlight that’s a perfect segue. He says are we finally starting to see an end to the race to the bottom and free delivery, especially with so many supply chain supply chain issues? I’m not sure how much supply chain has to do with it. But I’ve always personally been skeptical of the economics behind food and grocery delivery anyway, especially when they’re trying to call it free. So that raises the question. Maybe for you, Dan, I’d like to hear is this the beginning of a sort of cost correction for the delivery business?
Dan Kline 27:20 Yeah, I think it is. So I think there might be some very smart technology that helps the Ubers and the Doordashes and the Lyfts of the world where they get really, really smart with like, Steve can pay $1 less for his trip from the airport, if he’s willing to let the drivers stop and pick up Joe’s dry cleaning. Like, I think there’s going to be some of that that offsets cost. But the reality is, and I’ve talked about this a lot when it comes to the driver services.
If previously at the airport, I had to wait in line and spend $18 to get from the airport to my house, which is like two miles. If you are Uber or Lyft, you don’t have to undercut that buy at 3. You know, you don’t have to go to $6. And no waiting time, just no waiting time is good. So if you’re like $16 versus $18 and I don’t have to wait in a big long line. That would have been good enough. But because there’s two of them, we’ve had this sort of race to the bottom where they’ve made it about pricing.
Dan Kline 28:21 I fully expect that there’s going to be some major league baseball-style collusion in these industries where they basically say, hey, quietly, let’s just raise our prices 30% across the board. I think we’ve seen a lot of that, in the pandemic, especially when there aren’t enough drivers.
That’s been a real challenge. Not so much here in West Palm, where a lot of the trips are either really beneficial, like to airports, or just really local, and easy and the costs are relatively high. Up in Orlando, it’s been a big problem, because that’s such a big area that if you want to get picked up at your hotel, like where I am in Davenport, driven 20 minutes to Magic Kingdom. If there isn’t a fare waiting for you at Magic Kingdom, you could end up like two hours from home by the time you’re done with your shift. It can get really, really tricky. So yeah, technology will be important here.
But I do think we’re gonna see prices go up and I hate to say this as a consumer, but I think they should. I don’t want to see companies artificially keeping prices low. Now. Look, it’s one thing if you’re in the grocery space, if you’re Walmart and you say you know what, I don’t need to make money on grocery because maybe when you’re here you’ll buy some whatever, you’ll buy some sporting equipment or or you’ll buy some garden stuff which is high margin or whatever it might be or clothes or who knows what. That’s one strategy. But if your product is the is the loss leader, and I’m not selling you anything else, that is a really big problem.
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