Sorry, Wal-Mart: Amazon wants your food stamp customers as well

For years, Amazon.com has targeted shoppers who can afford a $99 Prime subscription. Last week’s announcement that it will deliver groceries to food-stamp recipients shows Amazon also wants to appeal to lower-income shoppers, traditionally Wal-Mart’s bailiwick.

Amazon is authorized to start the experiment this summer in New York, New Jersey and Maryland. Safeway also is joining the Supplemental Nutrition Assistance Program (SNAP), which last year provided more than $66 billion of help to 44.2 million needy Americans. Safeway will begin this summer in Washington, Oregon and Maryland, but no cities have been announced yet.

This will be the first time SNAP has accepted online payment for groceries.

Low-income shoppers are an intriguing target for Amazon, which has tried with mixed success to disrupt the $800 billion grocery market. More than 80 percent of food stamp recipients live in or near big cities, which are served by Amazon’s vast network of warehouses and home to the affluent and poor in close proximity. A truck delivering gluten-free chia seed bars and organic soy coffee creamer to Manhattan’s posh Upper West Side can also cart a box of cereal, bread and baby food to low-income housing projects in Harlem.

“There are very few retailers who can serve the high- and low-end of the income spectrum,” says Kirthi Kalyanam, director of the Retail Management Institute at Santa Clara University. “Costco customers are mostly affluent and Wal-Mart customers are mostly low income. No one retailer has been able to bridge the gap. Amazon is uniquely positioned to go all the way to the top and all the way to the bottom of the customer spectrum.”

Amazon’s competition for urban food stamp recipients include convenience stores with limited inventory and high markups, providing Amazon an opportunity to stand out with its vast selection and low prices. The delivery program also lets food-stamp recipients use the benefit more discreetly than in a crowded store, where other shoppers can see how they’re paying for their groceries. For now, it’s unclear if Amazon plans to deliver the groceries to doorsteps, require pickup from central locations or leave that up to shoppers.

Amazon’s push into groceries borrows a page from big box competitors that sell food at or below cost to get people into the store with hopes that they also buy higher-margin items such as clothing and electronics. People buy groceries frequently, putting a retailer in regular contact with the shopper and generating order volume that can help Amazon achieve economies of scale that are crucial to make e-commerce profitable. Annual online grocery spending in the U.S. will more than double to $70 billion by 2021, estimates Cowen and Company.

“For Amazon, this continues to drive logistics and transportation costs per unit lower as these routes are combined with current routes to create more efficient transportation costs,” says Neil Ackerman, a former Amazon executive who runs e-commerce initiatives at Mondelez International. “While this program is focused on groceries, it also allows for customers to buy in other categories that Amazon can deliver, like fashion and electronics.”

Amazon is the largest of seven retailers chosen for the two-year food stamps program. The Department of Agriculture, which administers SNAP, sees access to online groceries as a benefit to urban and rural residents with limited shopping options. The pilot will let the agency work out any payment and security issues before allowing online food stamp purchases nationally.

Serving food stamp recipients would put Amazon on the front lines of eliminating “food deserts,” urban and rural areas where healthy, affordable food options are scarce for those without cars. Doing so provides a public relations boost for a company better known for delivering a bottle of laundry detergent within an hour to a time-strapped shopper willing to pay $8 to skip a trip to the store. Amazon took heat last year after a Bloomberg investigation revealed that some predominantly minority neighborhoods in Boston, New York, Chicago, Dallas and Washington, D.C., were excluded from Amazon’s same-day delivery service. Amazon has since expanded the service and filled the gaps.

“We are committed to making food accessible through online grocery shopping, offering all customers the lowest prices possible,” Amazon said in an e-mailed statement. “Amazon’s selection and competitive pricing can improve the grocery shopping experience for SNAP participants while helping them extend their benefits further.”

The push is potentially bad news for Wal-Mart, which gets more than half its $298 billion in annual U.S. revenue from grocery sales. The world’s biggest retailer is already battling German-owned chain Aldi and other discount grocers for low-income shoppers. Now the world’s biggest online retailer is chasing those shoppers too. “It’s a whole new demographic and market for Amazon to tap,” says Edward Jones & Co. analyst Brian Yarbrough.

Amazon in April introduced a $10.99 monthly payment plan for Prime, making it more appealing to those who can’t afford a one-time $99 yearly fee. That helped Amazon increase Prime membership among those earning less than $25,000 a year from six percent in 2014 to 11 percent at the end of 2016, says Michael Levin, of Consumer Intelligence Research Partners in Chicago, which surveys Amazon shoppers.

“Some of these customers use food stamps,” Levin says. “So Amazon would naturally want to accept them.”