Another Company Getting Fresh
Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the past few years, there has been a growing trend toward freshness in the restaurant and grocery industries. Chipotle has been a huge success because of its dedication to quality food and fresh ingredients. Another major retailer now is launching its foray in to fresh ingredients.
The new player in freshness
Amazon (NASDAQ: AMZN) is a major success in many areas. The retailer started out just selling goods online. Now, it is a key player in B2B solutions, publishing, and retail, just to name a few. The company is launching AmazonFresh, a same-day grocery delivery service. It is a great idea, but will it make any money for investors?
The short answer is, no. Amazon has had a stellar rise to the top in recent years. It knows e-commerce, distribution, and order fulfillment better than any other company today. But, margins aren't strong enough in the grocery space to warrant an aggressive expansion.
The challenging margins of the grocery industry
Kroger (NYSE: KR) has nearly 2,500 stores across the country under a variety of brands. For the last three quarters, the company's gross profit margin has been between 20.2%-20.5%. The highest expense the company has is the cost of its product. Kroger's net profit margin is under 2%, fluctuating between 1.2%-1.9%. These are very tight and very challenging margins.
To stay profitable, Kroger has to add more services to drive more volume to its stores. It has increased its overall market share because of its commitment to providing loyalty programs. The company launched a new smartphone app and more online resources for deals and promotions. Use of these applications grew by 120% and 45%, respectively, in recent months.
This move toward loyalty seems to be a good one for Kroger. The company has enjoyed recent financial success, as the last 7 quarters have seen steady year-over-year growth. Next year will likely add more growth because of the new offerings in customer service.
Full year EPS growth rate is expected to be 5%. This isn't huge growth, but with such shallow margins, any growth is good growth.
A specialty grocery retailer
AmazonFresh won't be the everyday grocery store if it is rolled out nationwide. It will be a smaller, specialty store like Whole Foods Market (NASDAQ: WFM).
Whole Foods brings in a higher gross and net profit margin than Kroger. Its gross margin for the last three quarters has been between 35%-36%. This is mainly because Whole Foods can charge a premium for its products because they are natural or fresh. This higher sale price trickles down to the net profit margin, which has fluctuated from 3.7%-4.6%.
Whole Foods is the leader in freshness. The general consensus on the stock is a buy, and most analysts predict strong growth in the future. This is because freshness is the biggest influencer in grocery shopping today.
The company has grown its top line by nearly 4%, which is higher than the industry average. It's debt to equity ratio is almost zero (0.01). Plus, net income for the last quarter rose 20.7%. This is the type of performance that investors love.
In the next year, look for strong EPS and revenue growth. Earnings-per-share will likely hit close to $1.45-$1.50. If you own this stock, keep it. If you don't own, consider owning it.
The bottom line for Amazon
The only way for Amazon to bring real net income with its grocery delivery service is to charge a high premium on goods and delivery. It currently offers free delivery on orders $35 and over in its limited markets.
A major opportunity for Amazon would be up-selling any non-grocery items in the delivery. This could help cover small margins if the company were to sell electronics, media, or other goods along with groceries. Groceries alone won't be profitable. The margins are very small, even without transportation costs.
It is very important to note that Amazon is still a powerhouse and worthy of a buy. Its product mix is strong, with 31% of all revenue coming from media sales, 64% from general merchandise, and 5% from other services. The company is still a buy, just not for groceries.
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Austin Higgins has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Whole Foods Market. The Motley Fool owns shares of Amazon.com and Whole Foods Market. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!