Amazon.com is Taking Over the World… of Groceries

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Supermarkets compete to sell groceries in a high volume, low margin environment in towns of all sizes.  In 2011, the Food Marketing Institute estimates that this industry generated around $584 billion in sales in the United States.  The total market opportunity is so large that there has been a steady stream of competitive developments over time.  Among them, warehouse stores such as Costco (NASDAQ: COST) and discount retailers such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) have rapidly rolled out competitive grocery selections.  Whether it is the bulk-purchase model like Costco or the everyday low prices made possible by Wal-Mart and Target's scale, dominant retailers have been waging war against traditional supermarkets in recent years by seeking to provide the lowest prices possible. The obsession with price has been amplified in recent years as economic pressures have made household budgets tighter than in the past; as a result, Bloomberg conducts studies comparing the pricing of the major players and has concluded that customers "will be driven to whatever store offers the better value."

Amazon.com Enters the Fray

As this blog series is intended to illustrate, Amazon.com (NASDAQ: AMZN) seeks to disrupt retail across multiple sectors.  Regardless of competition and the nature of the established business model, Amazon.com is able to offer an array of appealing offerings to customers that leverage the company’s network of warehouses to provide a differentiated service to consumers from the established brick-and-mortar competition.  In a recurring trend throughout this blog series, which has covered everything from pet supplies to daily deals, Amazon.com has accomplished this through a trend of gaining a foothold in the industry through a variety of strategies including those described below:

  • Amazon.com – Within Amazon.com’s core website, the company now offers over 593,000 items within the grocery section.   While this is a vast selection, where Amazon.com differentiates itself is that 74,000 of these items are eligible for free shipping either through Amazon Prime or super saver shipping with a $25 purchase. 
  • Subscribe & Save – A growing component of Amazon.com’s retail assortment participates in a program known as “Subscribe & Save.”  Customers can receive a 5%-15% discount off of Amazon.com’s regular price and receive free shipping if they sign up for regular delivery of an item (anywhere from once a month to once every six months).  There’s significant convenience in this automatic delivery feature, the automatic deliveries can be canceled at any time and there are convenient email reminders prior to shipment that allow customers to skip deliveries with a single click.  Within the grocery section of Amazon.com, 26,000 items qualify for Subscribe & Save.
  • Amazon Fresh – Amazon.com has been fine tuning a full-service grocery solution with same-day appointment-based delivery in the company’s hometown of Seattle, Washington.  Known as AmazonFresh, this service provides a full range of products including an impressive array of organic foods and fresh meat and produce.  There is plenty of speculation that Amazon.com’s recent significant expansion of its distribution centers will allow it to roll out AmazonFresh offerings to other markets, beginning in California
  • Vine.com – One of the websites rolled out by Quidsi, an entity acquired by Amazon.com in 2010, is a full-service web-based organic grocery store called Vine.com; this site features popular organic brands such as Annie’s Homegrown and many others.  Vine.com is founded on a strict green philosophy that goes far beyond a focus on organic foods that differentiates it from the selection of stores like Target.
So, Amazon.com has 4 distinct strategies for growing revenues in the grocery business.  Several common themes that Amazon.com leverages to attract customers to these services are price, convenience of free shipping and the availability of specialty brands such as those made by Annie's and Hain Celestial.  In the longer term, it is expected that AmazonFresh will roll out its same-day, appointment-based full service grocery delivery to locations outside of Seattle.
 
How Does Amazon.com Compare to the Competition?
 
Amazon.com has the ambitious plan to compete simultaneously with the traditional supermarket, warehouse stores (e.g., Costco), discount retailers (e.g., Wal-Mart) and natural and organic markets such as Whole Foods Market.   On the price front, most studies have placed Amazon.com's offerings comparable to traditional supermarkets, less expensive than organic specialty stores and more expensive than warehouse and discount stores.  A New York Times experiment in 2011 found that Costco was 17% cheaper than buying in bulk using Subscribe & Save for a sample basket of items.  Likewise, a more recent test showed Amazon.com cost 20% more than Wal-Mart (and 13% more than walmart.com).  One takeaway from many of these tests show that Amazon.com does provide lower prices for certain items, but the scales shift in favor of brick and mortar retailers when it comes to heavy items (particularly liquids). 
 
So, price on its own is not got currently driving Amazon.com's grocery business other than in certain instances; however, websites helping budget-minded shoppers find the best deals frequently highlight the fact that Amazon.com has the best prices around on a specific item, particularly when the prices reflect the Subscribe & Save discount or Amazon.com's robust e-coupon offerings.  Depending on the specific item, Amazon.com may or may not necessarily win on price.
 
Convenience is where Amazon.com's competitive advantage really stands out.  There's nothing more convenient than free shipping to your doorstep.  This convenience can not be emphasized enough for people that have limited shopping alternatives in small towns across the country.  For the bargain shopper, Amazon.com's business model saves the consumer time and gas, potentially a lot of both if there isn't a Costco right around the corner.  For the organic shopper, Amazon.com's vast array of organic items include many brands not carried in traditional supermarkets (or discounters like Target).  Finally, the ultimate in shopper convenience is AmazonFresh; if expanded, this service will undoubtedly be popular amongst customers looking for a full-service delivery option that provides convenient appointment times.
 
Selection is another strength for Amazon.com.  While discounters like Wal-Mart and Target may win on price in general, they may not carry the exact item that someone is looking for; rather than making a separate trip to a Whole Foods for their favorite organic fruit snack (if there even is one nearby!), there is significant value in being able to obtain the specific item on Amazon.com and have it delivered for free.
 
How Will This Drive Amazon.com's Growth?
 
With $584 billion in sales in the U.S. alone, this market is large enough to support all sorts of retail formats and leave room for Amazon.com to carve out a sizable chunk of revenue.  Supermarkets, discounters, wholesalers and organic/natural stores will not be eliminated anytime in the near future.  However, there is room for disruption using the strength of Amazon.com's distribution network and the fact that Amazon.com has demonstrated in several industries that it can overcome fulfillment costs by not having to deal with the facility and personnel costs associated with physical storefronts.  When you add in the availability of products on Amazon.com that are not often available at your typical grocery store and the potential for differentiation through home delivery, there is significant opportunity.
 
The opportunity is there, and Amazon.com has positioned itself for growth through its significant investments in its distribution network.  However, it is important that Amazon.com find a sustainable way to operate a grocery business.  Webvan, a famous failure of the dot-com boom a decade ago, essentially tried the same concept as AmazonFresh with disastrous results.  

Foolish Bottom Line

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BrewCrewFool owns shares of Costco Wholesale and Amazon.com. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Motley Fool newsletter services recommend Amazon.com and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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