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.