Amazon's Fresh Take on an Old Idea
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
AmazonFresh, the grocery delivery service offered by Amazon.com (NASDAQ: AMZN), may be soon available in LA within weeks and San Francisco by the end of the year. Reuters reports 20 more cities are rumored for 2014 and there is further speculation for 40 cities in total and international Fresh delivery. The service is currently only available in Seattle.
What is the Amazon Fresh demographic? One commentator said the obvious is the busy working mother in an urban setting. One post on website about all things Kindle says it's obviously the baby boomers. I think it's also the Me-llennials (Millennials) who are already e-commerce savvy and also don't drive or own cars like their parents' generation.
Noodling around the AmazonFresh site its appeal to the Whole Foods Market (NASDAQ: WFM) customer is obvious. The Fresh service can be pricey for the elderly on a fixed income or the lower income. However, rich agoraphobics rejoice! If you can afford Whole Foods you can afford AmazonFresh -- as one yelp! reviewer noted the price point is close to Whole Foods.
Of over 120 yelp! reviews, the response was overwhelmingly positive, especially from those who had used Safeway (NYSE: SWY) home delivery before. One even wrote an ode to AmazonFresh based on the poem How Do I Love Thee. What complaints there are mostly relate to higher prices than Safeway and that the minimum order to get the free delivery keeps getting jacked up.
Purely unscientific but my best guess from the yelp! reviews is most of the reviewers were young urban professionals based on comments, i.e. the number of "Awesome!!"s, and photos. Many noted they lived in apartments and had no car.
Currently in Seattle, there is a minimum $50 order with $7.99 delivery fee and if ordered before 11 p.m. the night before, the groceries will be at your door pre-dawn. Order over $100 and the fee is waived.
Is Fresh a needle-mover?
Not yet...but as the service gradually (if not glacially, as the service has been available in Seattle since 2007) rolls out across the nation it is hoped this will become another entree to the Amazon ecosystem. As users become more comfortable with ordering groceries, they will certainly start to order more from the many Amazon specialty sites. Several yelp! users do cross-order groceries from Fresh and Amazon.com.
Fresh will change grocery shopping just as Amazon has changed publishing and e-commerce. While Wal-Mart and Target can't compete on the convenience, they have the buying power to compete on price.
It will really be Safeway and Whole Foods that will be challenged down the line. Safeway's advantage as noted on the reviews is cheaper prices overall and that AmazonFresh is sometimes out of stock on basic items.
Whole Foods will really have to look over their shoulder as AmazonFresh offers most of the quality goods they do at comparable prices. AmazonFresh also partners with local artisans bakers, cheesemakers, and the like to bring local specialties to Seattleites' doors.
Right now, Amazon Fresh seems to target the Me-llennials but as they offer the service to other states and further away from urban distribution more Boomers and elderly will gravitate to its convenience. All bets are off once they hit Sun Belt states; Safeway, Kroger, and particularly Whole Foods will see stiff competition.
An old idea in the 21st century
While a blockbuster rollout for Amazon Fresh is troubling for Safeway and Whole Foods there is a problem for Amazon if they don't get enough cross-shopping as the grocery business is a prosciutto-thin margin proposition. Safeway's profit margin is 1.48% and Whole Foods' is 4.13%.
Delivering groceries has always been a loss leader. For decades home delivery was considered a perk for patronizing a neighborhood mom-and-pop grocery but then the supermarket chains came in and killed home delivery.
Home delivery has been a difficult business, as NPR recalled the dot.com bust of Webvan. Royal Ahold has been working on perfecting Peapod, its grocery delivery service since 1989. Some of the yelp! reviewers fondly recalled HomeGrocer, a similar concept, which fell to the curb.
What goes around, comes around as consumers want home delivery back. The demand for the service is certainly there but profitability has always been the sticking point. Amazon has long been willing to sacrifice margins to the greater good of getting people to buy media, witness the Kindle e-reader and tablet devices. Amazon already has a negative profit margin of -0.14%.
As a consumer I am eagerly anticipating AmazonFresh delivery but an Amazon shareholder should wonder how long the rollout will take before cross-shopping profits will show up, if ever. In other words, don't buy Amazon on this grocery initiative alone. If you want a grocery stock Safeway has a 3.50% yield and a trailing P/E of 8.44. Of course, the shorts are betting big against Safeway at 23%. The supermarkets won once on price and could do it again.
Whole Foods will feel the brunt of online delivery more than Safeway, but even if Amazon is accelerating the pace of the rollout Whole Foods earnings shouldn't be affected for several years. People who can afford it still love to shop at Whole Foods for the experience. It trades at a 36 trailing P/E and offers a .80% yield.
Why buy Amazon at all?
Buying Amazon has always involved a certain leap of faith with a forward P/E in the '80s. Nonetheless, investors have been rewarded trusting CEO Jeff Bezos and his magic beans.
Buy Amazon for its role as the e-commerce leading retailer, for its cloud component or even for its foray into creating original entertainment content. Buy it for its Prime membership and all its varied specialty shopping sites but don't buy it thinking AmazonFresh is the newest bag of beans. These beans will be slow to take root. By mid-2014 investors should have a much better idea how AmazonFresh is a growth driver.
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
AnnaLisa Kraft 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!