When it comes to shopping on Amazon.com, Inc. (NASDAQ:AMZN), the last thing you’ll probably be thinking of ordering is your groceries for the week. But Amazon wants to change that, and that could be a boon to AMZN stock.
“AmazonFresh” is the e-commerce giant’s online grocery delivery service that the company hopes will lure even more customers to its web site.
After years of testing the AmazonFresh program in Seattle, the service began expanding to several cities in 2013. Today, AmazonFresh delivers groceries to customers in New York, New Jersey, Pennsylvania, Connecticut, California, Washington, and Maryland.
Amazon also sells non-perishable food through its Amazon.com web site and “Prime Now” program.
One Wall Street firm says that Amazon is going to be a force to be reckoned with in the U.S. food and beverage industry. Analysts at Cowen and Company LLC, led by John Blackledge, believe that Amazon will be a major player in the approximately $795 billion market by 2019. (Source: “One Wall Street Firm Says Amazon Is About to ‘Feast’ on the Food and Beverage Market,” Bloomberg, March 17, 2016.)
Despite going up against competitors such as Wal-Mart Stores, Inc. (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST), and Publix Super Markets, Inc., which also have online grocery delivery services, Blackledge believes that Amazon is “set to feast” on the industry. (Source: Ibid.)
One reason, Blackledge says, is that millennials, or those between the ages of 19 and 34, make up the majority of consumers for the online grocery market and they are about to enter their prime spending years. (Source: Ibid.)
Blackledge’s second reason is simply that Amazon dominates the online platform.
“Our survey data suggests Amazon Prime is the most-used platform (49 percent of online F&B customers said they use Prime), followed by Fresh (18 percent) and Prime Now (11 percent),” Blackledge wrote. (Source: Ibid.)
Cowen and Company estimates that out of the $795 billion the firm expects Americans to spend on food and beverages, $33.0 billion of that will be spent online. That’s only about four percent of the total market but the segment is showing solid growth.
Estimates are a bit all over the place, but according to BI Intelligence research, online grocery sales will increase 21.1% annually through 2018, compared to 3.1% for physical grocery stores. (Source: “The e-grocery explosion,” Internet Retailer, August 3, 2015.)
A more tepid report by IBISWorld says the online grocery market is valued at $10.9 billion in the U.S. and is expected to grow 9.6% annually by 2019. (Source: “Google to Start Testing Grocery Deliveries This Year,” Bloomberg, September 8, 2015.)
Either way, it’s not hard to see why Amazon wants to thrive in this space.
Online grocery delivery has the potential to bring in more sales down the line, but it could also increase profits by reducing shipping costs. People tend to buy groceries daily or weekly and there are bound to be add-on sales from general merchandise like a book or movie, which will justify shipping costs.
The move also helps Amazon to build out its own global distribution network, which it is quietly doing. Amazon will need more trucks for grocery delivery, so it will have to reduce its reliance on outside shipping companies, which have contributed to soaring costs. In 2015, shipping cost Amazon about $11.5 billion, while revenue was about $6.5 billion. (Source: “Amazon’s shipping revenue and outbound shipping costs from 2006 to 2015 (in million U.S. dollars),” Statista, last accessed March 29, 2016.)
The Bottom Line on AMZN Stock
It may take a while, but Amazon is serious about building its grocery business. The e-commerce giant recently announced that it is expanding AmazonFresh and Prime Now grocery delivery services overseas to the U.K.
Investors will need to be patient, but the payoff for AMZN stock might be big when Amazon’s online grocery business really takes off.