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Amazon can cut grocery prices at Whole Foods and still make more money than it does now

  • Amazon said the Whole Foods deal will close on Monday after shareholders approved it.
  • The e-tailer said in a press release on Thursday that it will instantly lower prices on some groceries.

    Imagine being a tech company with so little profit that you could buy a grocery store and cut prices all while improving your margin.

    Yes, that's Amazon.

    In announcing the upcoming close of its $13.7 billion acquisition of Whole Foods on Thursday, Amazon also said that starting next week, it will offer lower prices on popular items, including "Whole Trade organic bananas, responsibly-farmed salmon, organic large brown eggs, animal-welfare-rated 85% lean ground beef, and more."

    Here's why that's possible.

    The other tech giants -- Apple, Alphabet, Microsoft and Facebook -- have operating margins for the latest quarter ranging from 23 percent to 47 percent. That's the percentage of profit left after subtracting all the costs of goods sold as well as expenses for research and development, sales and marketing and administration.

    Amazon's operating margin for the second quarter was a paltry 1.7 percent. Whole Foods recorded operating profit of 4.8 percent.

    For Jeff Bezos, that gap amounts to play money. Investors have continued to bet on Amazon, bidding the stock up 26 percent in the past year, despite Bezos' willingness to run with retail-like margins. With those kinds of returns, shareholders certainly aren't going to be asking for a buyback or dividend.

    Whatever profit the company generates from its highly lucrative Amazon Web Services division gets consistently invested back into other projects, whether that's developing robots, drones and consumer devices, building fulfillment centers or buying movies and TV shows for its streaming service.

    Whole Foods will get similar treatment.

    As analysts from research advisory firm Gordon Haskett wrote in a June report after the proposed deal, Bezos will get "a plethora of new teammates to help the company reduce costs, localize assortments and improve both in-store price/perceptions."

    That's good news for kale lovers. And bad news for rival supermarkets that, until now, could at least refer to their upscale rival as "whole paycheck."

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