Grocery Wars: Can AmazonFresh Grab a Place at the Nation's Table?

 

NEW YORK (TheStreet) -- Rumor mills are working overtime that a top priority for Jeff Bezos, CEO of Amazon.com (AMZN) , is grabbing a big piece of the groceries market and that, in his usual style, there already are signs he is committed to cut prices to gain market share for AmazonFresh, an initiative that delivers groceries to consumers homes in parts of Washington State, Los Angeles, and San Francisco. AmazonFresh is slated for broader rollout to many more cities in 2015, said several analysts.

That news is worrisome enough for some that in a mid-November call with analysts, Wal-Mart (WMT) CEO Greg Foran threw down a gauntlet to protect his company’s status as the nation’s largest grocer. Store managers are authorized to price match Amazon and other online merchants, said Foran.

Does that mean Wal-Mart is at war with Amazon? Maybe not. The two companies, multiple analysts said, pursue dramatically different customers.

The bigger, more pressing question is: Can Amazon win meaningful share in the grocery market?

First, a related question: Why does Amazon want into groceries in the first place? It’s a notoriously low-margin business. But what it has going for it is what retail analysts call frequency. A customer may buy a book a month at Amazon, but a grocery shopper buys milk and eggs and cheese pretty much weekly, often several times a week. Those repeat visits are what unlock profits because, the thinking goes, the customer who logs in to buy milk may also buy a high margin smartwatch or MP3.

This strategy already works at Wal-Mart, where roughly half the sales are in groceries, said Brian Yarbrough, a senior analyst with Edward Jones. But every visit for eggs is an opportunity to sell more profitable items, from car batteries through tires and winter coats.

One fact: Many are watching the online grocery market. Said Carrie Bienkowski, CMO at home delivery pioneer Peapod, a wholly owned subsidiary of big Dutch grocer Ahold (AHONY) (Stop & Shop and Giant in the U.S.), the online market today is perhaps 1% to 2% of total U.S. grocery sales “but is growing faster than anything else.”

That means Amazon is eyeing an opportunity that just may be primed for explosion, especially as aging Baby Boomers decide it’s just more convenient to get home delivery of food than to schlep it themselves.

A strength Amazon brings to groceries is it has already established its prowess at home delivery. That’s a fact. But it has little expertise in shipping perishables on tight timetables.

Said Peapod’s Bienkowski: “There’s a difference between being a food company and a technology company. Delivering stable merchandise is very different than delivering a full grocery cart, with 100 items and six different chill zones. An avocado is in a different temperature than berries.” Books are one thing; frozen food, meats and eggs are a different matter altogether.

Cody Gunn, president of Gunn Capital Management, LLC in Brewster, Wash., also wondered if Wall Street’s intensifying pressures on Amazon to show real profits will “cause Amazon to focus on its core business more than expanding periphery businesses like grocery distribution.”

He pointed to the recent third-quarter results where Amazon reported revenue of $20.58 billion but a loss of $437 million. Said Gunn, you have to wonder just how patient Wall Street will be if Bezos commits to spending what Gunn believes would have to be “huge” amounts to win Amazon a toehold in groceries, especially given how low-margin it is.

Amazon would also have to compete on price with Wal-Mart and, said Gunn, which would further pressure the company’s ability to show a profit. At the very least it would take Amazon some years to build a real grocery business.

Will Wall Street have the patience to wait out the losses that would likely arise in the buildup? No one knows. But, said Gunn, with losses at Amazon probably rising this year, “the company will have to focus in on its core businesses.” Groceries, he said, aren’t part of that. That just may mean that Amazon will find itself backing off groceries to pursue businesses with higher returns.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates AMAZON.COM INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate AMAZON.COM INC (AMZN) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, generally disappointing historical performance in the stock itself, poor profit margins and feeble growth in its earnings per share."

You can view the full analysis from the report here: AMZN Ratings Report

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