Commentary

How Amazon’s Newest Venture Could Test Walmart

Jun 11, 2017

Amazon took its heated battle with Walmart to another level this week through its discounted Prime membership offering to consumers receiving U.S. government assistance.

Discounted Prime is a direct attempt to garner share in what has been a lucrative business for Walmart: low-income customers. It also counters Walmart’s recent introduction of free shipping with no fees, curbside grocery pickup, and E-commerce acquisitions. According to Morningstar, nearly $1 out of every $5 in Supplemental Nutrition Assistance Program (SNAP) benefits (more widely known as “food stamps” using EBT cards) was spent at Walmart last year, amounting to roughly $13 billion. Just 21 publicly traded brick and mortar retailers generated more than $13 billion in total sales last year, according to Retail Metrics calculations.

Moreover, Amazon is tapping into a broader customer base of 43 million consumers that received $66.6 billion in annual SNAP payments. The E-commerce giant has the foresight and patience to convert many of these consumers that are in temporary need of assistance to what Amazon hopes will be lifelong Prime members. CEO Jeff Bezos has made Amazon’s intentions clear: “Our goal with Amazon Prime, make no mistake, is to make sure that if you are not a Prime member, you are being irresponsible.”

This move was prompted by Amazon’s own success penetrating upper-income consumers, with 82% of households making $112,000 a year already Prime members, according to a Piper Jaffray study. It is also simply another component of its overall strategy to dominate every segment of retail. Low-income household Prime penetration is only 52% for consumers making under $41,000 and even lower in the under $25,000 segment, where many accepting government benefits reside. This offers Amazon higher growth potential and deals a blow to Walmart by luring a key customer to Amazon’s ecosystem.

Amazon’s discounted Prime will likely make major inroads over time. Amazon is relentless, innovative, and executes at a higher level than virtually anyone in corporate America. Amazon’s share of online sales has grown from 25% in 2012 to 43% in 2016, according to Slice Intelligence. It can grow even further: Of consumers living at or below the poverty line, 74% have access to the Internet.

This presents a huge opportunity to provide an affordable delivery service to this segment of the population. The cost of discounted Prime membership is roughly 5% of the average monthly SNAP assistance a consumer received in fiscal year 2017. Layer on top of this the further advantages Prime membership offers—music and video streaming, original content, photo storage, and doorstep delivery—and it becomes a difficult proposition to decline.

Dovetailing nicely with the introduction of discounted Prime was the launch of Amazon Cash earlier this year. Amazon Cash offsets the lack of credit card ownership among the low-income population by allowing consumers to put cash into Amazon accounts at more than 10,000 physical locations throughout the U.S. This paves the way for more Prime purchases while providing further impetus to join the Amazon ecosystem.

Targeting low-income Americans could prove a solid business strategy as well. The economics of Prime are such that frequent Prime users, while purchasing more, drive up shipping costs. Discounted Prime members are likely to shop less frequently, lowering shipping expenses while Amazon still receives their monthly membership fees. Positive public relations and goodwill from lower-income consumers are additional ancillary benefits Amazon may derive from discounted Prime. This would be another feather in the cap of a company that already boasts top-level customer service ratings.

With discounted Prime, Amazon has taken the gloves off once again. It will almost certainly be successful. Walmart, dollar stores, grocers, and discounters are all on notice. Amazon presents an existential threat to the entire industry and retailers must sharpen every aspect of their business to compete.

Ken Perkins is president of Retail Metrics. He has no investments of the companies mentioned in this article.

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