Amazon will have to spend a big chunk of cash to turn around customers' perception of Whole Foods, but it can't do that forever.
What's the first thing you do after you spend $13.7 billion on a grocery store known for its high prices? Well, if you are Amazon, you slash those prices on the first day you gain ownership of the stores.
With a huge $21.451 billion bundle of cash (and cash equivalents) on its balance sheets, Amazon can afford to lose a bit while it cuts prices at Whole Foods in order to make its newest acquisition more popular. But, Amazon isn't looking to take a loss forever.
UBS discussed Amazon's plans for the high-end grocer in a conversation with an unnamed former VP of Amazon Fresh: "Contrary to public perception, he noted Amazon is not looking to be unprofitable in this category, though they are not afraid to invest in the near-to-medium term to drive the flywheel around price, convenience and selection."
The decision to buy Whole Foods was a "build vs. buy" decision for Amazon, according to UBS. Amazon is looking to wedge itself into the consumable goods space, aka food stuffs, and Whole Foods was a way of leapfrogging into that business.
The grocer's private label "365" products are one way the company was able to gain traction. The brand is specific to Whole Foods, and Amazon has already started listing the products online, increasing its number of available products, a proven strategy for Amazon, according to UBS.
The Whole Foods stores can also act as small "warehouses" located in highly populated and affluent areas of the country. UBS suggested that any company trying to make it in the delivery space would have to make four deliveries an hour to be profitable, and gaining hundreds of stores will reduce the cost of the "last mile" for Amazon. The e-commerce company is already pretty savvy when it comes to logistics, and the addition of Whole Foods locations as delivery centers could eventually drive more business to Amazon, according to UBS.
The bank has a price target for Amazon of $1,200, which is about 22.13% higher than the company's current price.
Amazon is up 33.21% this year.