Emerging Leaders in Online Grocery Shopping and Home Delivery

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

Expect to see online grocery sales expand in the coming years, as more online shopping opportunities are made available to the public. Online grocery sales currently account for 1% of the $631 billion U.S. grocery market. As retailers perfect their revenue models for online grocery shopping, expect to see online grocery and home delivery services rapidly expanded to markets across the country.

Amazon, the perceived leader

Amazon (NASDAQ: AMZN) recently rolled out Prime Fresh, an annual membership model to get customers to participate in the Amazon Fresh grocery home delivery program. Amazon Fresh is only available in limited markets at the moment, but plans are in the works to expand to 20 different cities across the globe.

The membership for Prime Fresh will cost $299 per year and offer free same-day and overnight shipping on grocery and household items. Amazon has proven the success of membership models through their existing Prime membership. Amazon has learned that offering a fixed annual membership cost that includes free shipping incentivizes customers to make Amazon their first stop when shopping.

As an added benefit, Amazon has discovered that Prime members often make additional purchases beyond their original shopping intentions. Amazon hopes that the same customer psychology will come into play with the new Prime Fresh model and encourage additional purchase beyond groceries. This will help make the grocery and home delivery services more profitable and prove to be a working revenue model.

Amazon plans to expand Amazon Fresh services to the San Francisco area later this year. If the project goes well, then we can expect to see a massive deployment of Amazon Fresh to several major cities. As an investor, carefully watch Amazon’s deployment of Prime Fresh to new markets. Rapid deployment to new markets will likely indicate that they have found a profitable model for Amazon Fresh and are looking to increase earnings.

Wal-Mart, the strategic giant

Wal-Mart (NYSE: WMT) has been experimenting with the grocery home delivery model since 2011. In the United Kingdom, Wal-Mart owns a subsidiary called Asda. Asda is currently the largest online grocery shopping and home delivery service in the U.K. The service has worked so well that they are testing similar services in U.S. markets.

Wal-Mart currently has a “Wal-Mart To Go” service available in San Francisco and San Jose. Although Wal-Mart is testing the concept of online grocery shopping and home delivery, they don’t appear to be paving the way in the market place. Wal-Mart’s Global e-Commerce President, Neil Ashe has recently indicated that the concept isn’t ready for mass implementation in the U.S. at the moment. She has suggested that the U.S. market doesn’t have the same level of customers willing to use the home delivery services as in the U.K.

It appears that Wal-Mart is waiting in the wings for its rivals such as Amazon to take the lead and pave the way for home delivery. When Amazon starts to prove the concept and show profitable margins with home delivery, expect Wal-Mart to jump on the bandwagon.

Kroger, the seeker

The big retailers such as Wal-Mart and Amazon are not the only grocery retailers looking to get into the online grocery game. Kroger (NYSE: KR) has been testing online shopping and home delivery at its King Soopers stores located in the Denver area. The company has been testing the concept of home delivery for several years. The Chief Operating Officer, Rodney McMullen has indicated that the company is still trying to figure out the economics and find a model that is actually profitable for the company.

Kroger continues to experiment with online grocery shopping to make the model viable for profitability and scalability. Kroger recently announced that it intends to purchase Harris Teeter for $2.4 billion. Harris Teeter will help Kroger in the deployment of online grocery shopping and delivery. Harris Teeter has a service called Express Lane online shopping service. The company has been working hard to get shoppers to understand the benefits of online shopping and home delivery. Kroger will benefit greatly from Harris Teeter’s experiences in the home delivery market.

As an investor, carefully watch the Kroger acquisition of Harris Teeter. Keep an eye on Kroger’s most recent developments in online grocery shopping and home delivery. Kroger may walk away from the acquisition with new insights on how to make online shopping and home delivery profitable.

Safeway, a future leader

Safeway (NYSE: SWY) currently has an online home delivery service called Grocery Works available in about six different markets. Safeway’s Senior Vice President of Finance and Investor Relations has indicated that Safeway does not see their online efforts as a vehicle for growth. She has indicated that the services are useful for those who have a hard time moving around or are purchasing large items that are heavy to carry. It appears that Safeway has viewed home delivery as a way to offer extended customer service to patrons who are need of home delivery services.

Tesco, Britain’s biggest supermarket chain has recently announced that it is considering a bid for Safeway. In June, Tesco struck a deal with Safeway to inject $22 million into Grocery Works in return for a 35% stake.

Tesco has invested close to $60 million in its store-picking system, where online orders are fulfilled from the shelves of retail locations. The company has built up a profitable online food business with a turn over of approximately $450 million a year. Tesco is looking to expand the success of their online delivery model to Safeway stores across the U.S. With the acquisition of Safeway, Tesco could make the grocery retailer the leader in the online home delivery market.

As an investor, carefully monitor the Tesco acquisition of Safeway and the roll out of Grocery Works to new markets. Tesco has a proven online business model that should translate well to U.S. markets. The benefit of using Tesco’s model is that it leverages the already established Safeway retail locations as fulfillment centers.

The bottom line

The front-runners in the online grocery business will most likely be Amazon and Safeway. Amazon will rapidly expand to several markets once they have proven a successful revenue model in its test markets. The company runs operating margins of less than 1% and will need to rapidly expand Amazon Fresh to several markets to show significant earnings from home delivery.

Safeway, with the help of Tesco, will leverage the use of preexisting retail locations to penetrate the market. Tesco already has a proven online grocery and home delivery system. Carefully watch Safeway and Tesco as they deploy their Grocery Works system to multiple markets across U.S.

The majority of retailers such as Kroger and Wal-Mart will most likely wait in the wings until other retailers establish the demand for online grocery shopping and home delivery. Once customer demand has been established, expect to see these grocery retailers enter the online grocery market in full force.

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Ryan Sullivan has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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!

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