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Amazon Prime Fuels Holiday Dominance But the Membership Faces Challenges

Chances are even Santa’s shopping on Amazon this year.

The e-commerce giant has eclipsed all other retailers as the go-to destination this holiday season. The company largely has Prime to thank but new data suggests the membership program could be reaching its limits.

The latest CNBC All-America Economic Survey found that on average holiday shoppers anticipate spending more than $900, which the publication notes is probably due to spurges by a few wealthy shoppers. Even so, that average is the highest in the survey’s 12-year history and tops last year’s $702 average.

E-commerce comes out as the big winner for a second year in a row with 45 percent of the 800 Americans polled saying it’s their top shopping destination. And 66 percent of those people will do most of their shopping on Amazon specifically.

While ranked second, it’s a distant second to say the least. Only 8 percent of online shoppers search the site.

And it’s not just the holidays, 65 percent of e-commerce shoppers generally or always search on Amazon, with a whopping 57 percent of those converting to sales. For perspective, the average conversion rate is 3 percent online.

The company’s Prime membership seems to be the reason for Amazon’s dominance since it speaks to the No. 1 concern for 43 percent of shoppers: free shipping.

Prime’s limits

While Prime has been fueling the Amazon engine, Morgan Stanley recently reported it may be losing steam. The financial advisory firm found that Prime memberships in America were at 40 percent during the third quarter, which is the same membership level from Q4 last year.

This data is significant because it suggests Prime is meeting its penetration limit. Morgan Stanley says the retailer must figure out how to attract lower income households and older shoppers.

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Research from Cowen and Co. shows that the more consumers make, the more likely they are to have a Prime membership. For example, penetration in households earning $150,000 or more is 70 percent, compared to 53 percent for those pulling in $50,000 to $74,999 and 36 percent for households making less than $25,000, according to Cowen.

To address this divide, Amazon has made concessions to help it woo shoppers of all wallet sizes. The first happened last year when the retailer launched a $10.99 a month Prime plan. While it ultimately costs more than the annual option, it makes it easier for shoppers who can’t afford one lump sum. Plus, it provides the option for them to turn it on and off, as needed.

This summer Amazon rolled out a $5.99 per month plan for consumers who are eligible for food stamp programs.

Walmart’s strategy

Amazon’s new lower price and flexible plans show the e-commerce giant is making a play for Walmart’s traditional market of lower middle-class households. According to an A.C. Nielsen 2015 study, roughly 49 percent of U.S. Walmart shoppers have household incomes below $50,000, 33 percent between $20,000 to $50,000, and 30 percent in the $50,000 to $100,000 range, while modestly under-indexing among $100,000+ household incomes.

Though consumers’ preference for Amazon over Walmart this holiday season shows the latter is hardly competition online today, the big-box retailer is positioning itself to be a bigger threat in the years ahead.

With acquisitions of digitally native brands like Bonobos and ModCloth and its partnership with Lord & Taylor as the anchor for its upcoming digital mall, Walmart is attempting to go upmarket. These developments also serve to boost Walmart’s e-commerce business, putting it firmly in Amazon’s playing field. The big-box retailer even recently changed its name from Wal-mart Stores, Inc. to Walmart Inc. to reflect the company’s omnichannel nature.

The company’s push to balance its online presence with the 4,752 stores it operates in the U.S. becomes clear when you look at the numbers. As of 2015, Walmart shoppers spent $1,400 on average in store, $200 online and but those that shopped across channels spent more than $2,500 a year. According to Cowen’s tech analyst John Blackledge, the average Amazon Prime member spends about $1,300 annually versus $600 by non-Prime Amazon shoppers.

It remains to be seen if Walmart will be able to change perceptions enough to attract a wider consumer base. But if it’s successful, the retailer could attract brands that have been reluctant to sell on Amazon.

—Additional reporting by Marie Driscoll