By Jeff Berman
NEW YORK (TheStreet) -- The new Prime Now one-hour delivery service that Amazon (AMZN) launched in Manhattan Thursday stands to challenge rival retailers who rely on convenience purchases. The service could lead to a larger number of small items being purchased online instead of at brick-and-mortar retailers in New York and other cities that get the service when Amazon expands it in 2015.
Prime Now will likely not be profitable for Amazon on a short-term basis. But it stands to help the e-commerce giant in the long term because it will help bolster its Amazon Prime service in general, analysts said.
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Prime Now will “hurt retailers who rely on convenience,” said Wedbush Securities analyst Michael Pachter. “That means small items, like batteries and phone accessories” at Best Buy (BBY) and “like paper towels and toilet paper at the grocery store, are going to see greater sales online at the expense of brick and mortar,” he said.
But Pachter maintained a neutral rating on Amazon because “they tend to spend more than they take in,” he said.
Pachter predicted Prime Now is “not going to be profitable short term” because it costs a lot of money for Amazon to deliver products so quickly to Amazon Prime members and it doesn’t “generate incremental revenue.” Amazon will “get some margin on the sale, but [its] prices are so low on convenience items that it won’t offset” the incremental delivery cost, he said.
Prime Now will, however, help Amazon in the long term because it’s “another reason for consumers to sign up” for Prime, which costs members $99 a year and “drives higher overall purchase activity,” said Pachter.
Wells Fargo Securities analyst Matt Nemer agreed, saying in a research note that Prime Now “will further strengthen the bond with Prime members in urban markets.” The new service “could be disruptive” to local retailers and chains with urban stores, he said. CVS (CVS) and Target (TGT) representatives declined to comment, while Best Buy and several other major retail chains with Manhattan locations didn’t immediately respond to requests for comment.
Amazon is charging a $7.99 fee for one-hour delivery, with a minimum order size of $15. But the offer is “very compelling” because Uber Rush charges about $16 in Manhattan and other same-day delivery services, including Fresh Direct and Google (GOOGL) Shopping Express either are not as fast, “don’t have the same breadth of selection” offered by Amazon, or charge more for delivery, said Nemer.
Despite Amazon stressing the one-hour or less component of Prime Now, the company is also offering a two-hour delivery option for free that Pachter predicted will prove to be more popular. He doubted many consumers will spend $7.99 to save an hour, he said. Amazon declined to speculate which option will prove more popular.
Although prominent quick delivery online services Kozmo.com and UrbanFetch failed in the past, Pachter predicted Prime Now will work for Amazon due to “critical mass.” Amazon probably generates 5% to 7% of its U.S. sales from New York, meaning around $2 billion to $3 billion annually, so “that is enough to justify an increased fulfillment presence,” he said.
But the “big concern” CRT Capital Group analyst Neil Doshi has is how Prime Now will “scale” profitably in much of the U.S., once Amazon gets beyond big cities like New York and Chicago. It’s “kind of unclear” now how Amazon will do that, he told TheStreet. Like Pachter, he predicted that the two-hour delivery option will prove to be more popular than the one-hour one unless there is an “emergency” such as a consumer running out of diapers for a baby. Customers will have to spend a lot of money to “justify” the $7.99 cost otherwise, he said. “Any brick-and-mortar retailer would be worried” about Prime Now, including Target and Walmart, he said.
There are “tens of thousands” of products available via Prime Now, said Amazon. Although the service initially launched only in select areas of Manhattan Thursday, Amazon said it plans to expand the service into more areas of the New York City borough throughout the day.
Amazon declined to say if it will expand the service to other New York City boroughs. All Prime members can download the Prime Now app and they will be notified when the service is available in their local area, it said, also declining to name other cities that will be getting Prime Now next year.
"We rate AMAZON.COM INC (AMZN) a SELL. This is driven by some concerns, 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