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Amazon Prime discount for food-stamp families aims at Walmart

Free shipping wars

Amazon's Prime membership has thrived thanks to the fat wallets of America's upper-income households, but the service is now coming after Walmart's bread-and-butter: lower-income shoppers who often rely on food stamps and other government aid to make ends meet. 

Amazon (AMZN) on Tuesday said people who receive government assistance such as food stamps can qualify for a discounted Prime membership of $5.99 per month, compared with the typical monthly fee of $10.99. Customers who can pay for a full year of membership up front are charged $99 annually. 

The offer comes at a time when the rivalry between Amazon and Walmart (WMT) is growing fiercer. Walmart is taking a larger share of online sales and ramping up services that appeal to young families such as curbside delivery. Yet Amazon's Prime has made strong inroads with upper-middle class families, as one analyst has estimated at least 7 out of 10 households with more than $112,000 in annual incomes have the service. Walmart's core customer tends to be poorer, with about one out of four earning less than $25,000 per year. 

"It certainly is an attempt to muscle in on a territory that has been very lucrative for Walmart," said Neil Saunders, managing director of GlobalData Retail. "Amazon is conscious that Walmart is ramping up its efforts in ecommerce, and Amazon wants to respond to that in a defensive way."

By offering a discount to food-stamp recipients, Amazon is reaching out to a customer base of 43 million people who receive the benefit, also known as SNAP, or the Supplemental Nutrition Assistance Program. The federal program delivers $66.6 billion in annual grocery benefits to low-income shoppers. On a per person basis, the benefit averages only $125 per month, but gaining even a small share of that spending could help Amazon boost revenue and its bottom line. 

"There are customers in the U.S. who get into temporary states of need," Amazon spokeswoman Julie Law said. "We hope they get so much value that they become lifelong customers."

Walmart wants to give Amazon a run for its money

Amazon said customers will need to qualify with a valid EBT card, which are typically used to distribute funds from the food-stamp program and other assistance programs. EBT cards can't be used to pay for the Prime membership. The retailer said it will add other ways to qualify for the discount for government aid programs that don't use EBT cards. 

The discounted membership will include the same benefits as full-cost Prime access, including Prime video, music, photo sharing and free two-day shipping, among other benefits. 

Amazon is rolling out the discount while the U.S. Department of Agriculture tests a pilot program this summer that will allow seven online grocery stores to accept food stamps, including Amazon. The test will be modest, but it has the potential to shake up the $800 billion grocery industry, given its reliance on food-stamp spending. Amazon's Law said the discounted Prime service isn't related to the USDA test, however. 

While targeting low-income Americans might not appear to be a lucrative strategy, it could prove to be a smart tactic. The economics of Prime can be "quite perverse," Saunders said. For instance, frequent Prime shoppers are less profitable for Amazon because of the higher costs of providing repeated free shipping.

"If these lower income customers use them a little bit, it could make this a quite cost effective thing for Amazon to do," he said. "They'll get income from payments from Prime, and not too many items they then have to ship out. It could work out quite well."

Aside from bolstering its top and bottom lines, Amazon may experience a halo effect: gaining goodwill from customers who may have hit hard times and are facing proposed cutbacks in benefits under President Donald Trump's 2018 budget. The Trump administration wants to cut $192 billion from the food-stamp program over the next decade.

Amazon's Prime discount "is almost a form of welfare being run by a corporate organization," Saunders said. "It will help Amazon commercially and that's the driving force, but it's a wider play of Amazon positioning itself as a good corporate citizen." 

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