Amazon is rethinking the role that Whole Foods plays in its store lineup

Amazon shuttering dozens of stores means Whole Foods is key to its physical strategy — and reveals a shift in how it lures in new Prime members, analysts say

Amazon is at a crossroads in its store strategy, and analysts predict its grocery stores will gain importance.

Earlier this month, the company said it would shutter several of its physical retail chains, including Amazon Books, 4-Star, and Pop Up stores. Reuters first reported the news.

That means the online retail giant's physical footprint is now almost entirely Whole Foods, Amazon Fresh, and Amazon Go stores, focusing on groceries, prepared foods, and other fast-moving goods. (It has also announced it will open one Amazon Style store focused on apparel in Los Angeles at some point in 2022.)

"An inflection point is probably a good way to frame it," RJ Hottovy, head of analytical research at Placer.ai, said of the Amazon's changes to its physical store strategy.

In all, Amazon said it would close 68 stores. That's a fraction of the number of grocery stores' locations: Whole Foods operates about 500 stores worldwide, while Fresh has 25 locations.

Amazon's narrower focus on food while experimenting with apparel is meant to get customers into its stores as often as possible, Hottovy said.

Groceries and clothes are "two of the largest retail categories out there, and ones that you typically see the highest repeat visits in," he said.

Amazon's book stores, 4-Star locations, and Pop Up shops helped attract new customers to Amazon and its Prime membership, Hottovy said.

But Hottovy, who has followed Amazon since it went public in 1997, said that Amazon is now trying to get more business from its existing Prime members.

That includes getting customers in the doors at Whole Foods and Fresh stores more often, he added. According to data from Placer.ai, both of Amazon's grocery chains averaged about three times the number of visits per customer as the three banners it's closing, according to data from Placer.ai.

"It's not so much customer acquisition," Hottovy told Insider. "It's more customer frequency."

But Whole Foods has work to do to get customers in the door more often, according to Hottovy.

Almost five years after Amazon acquired the chain, Whole Foods is far from dominant when it comes to grocery pick-up and delivery. "We're seeing a lot of other grocery stores have success with buy online, pick-up in-store," he said.

Walmart and Target have aggressively expanded their curbside pick-up and delivery operations. In contrast, Whole Foods has had to contend with challenges such as a lack of coordination between Amazon Prime shoppers and Whole Foods employees, Hottovy added.

Figuring out the relationship between Whole Foods and Fresh is vital for Amazon, said Celia Van Wickel, senior director of digital commerce at Kantar, a data analytics and brand consulting company.

Recent changes at Whole Foods suggest that Amazon is rethinking the role that Whole Foods plays in its store lineup.

Last month, it told some employees that fill Prime grocery orders at Whole Foods that they would have the option to become direct employees of Whole Foods. Currently, the workers report to Amazon even though they work at Whole Foods stores.

Amazon also fitted a Whole Foods store in Washington, D.C. with its Just Walk Out technology, which uses cameras to monitor what customers pick up in the store and debits their account once they've left the supermarket.

"I think they are still reevaluating the right strategy for Whole Foods in relation to all the banners that they're going to focus on more closely," Van Wickel told Insider.

But those adjustments might not be enough to make Whole Foods the powerhouse of Amazon's physical store presence, she added. While Amazon acquired Whole Foods in 2017 for $13.7 billion, it has built Amazon Fresh and Amazon Go from scratch over the past few years.

That leads to a question facing Amazon as it opens new stores in the future: "Is Whole Foods going to maintain the lion's share, or are they going to expand the Amazon-named banners — Go, Fresh — to balance out that count in the future?"