Amazon's New $850 Billion Market
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
That's right. Amazon (NASDAQ: AMZN) is introducing itself to a $850 billion market that very few people know about. This market is based on personal consumption expenditures data from the Bureau of Economic Analysis -- it's produce. No, this near trillion dollar market isn't global, it's just in the U.S.. Let's take a look at what it is, what the growth opportunities are and how it might affect other grocers.
What exactly is it? It's basically an online grocery business that offers same-day delivery for orders over $35. How does Wal-Mart (NYSE: WMT) compete with that? Pricing? Maybe. It's a matter of convenience. People are willing to pay more money for the convenience of never having to leave their house, but still be able to go grocery shopping. What's it worth to you?
Think about it. Get on your computer, order lettuce, chips, bread, potatoes, spinach, and your favorite cake. A few hours later, the food arrives at your house. Obviously this is convenient for elderly people, as shopping is often a big hassle. It is also convenient for parents with kids. This solves the issue of going to a store and forgetting half of what you went for because you are more worried about losing your little ones. AmazonFresh is all about convenience.
Wal-Mart has nearly 4,500 stores nationwide. Amazon is just getting started and its website shows that AmazonFresh is now available in the Los Angeles area. Reuters has reported that the San Francisco Bay area will soon be added.
The cost of AmazonFresh
The actual cost of the food is supposed to be very competitive with the major grocery stores. There is a kicker, which is where Amazon will make most of its money. Like Costco (NASDAQ: COST), there is a membership fee. Costco's annual membership costs $110. Amazon Fresh is far more expensive, but again, people are paying for convenience. The annual Amazon Fresh membership fee is $299, however, this fee includes Amazon Prime benefits.
Amazon has seen amazing success with Amazon Prime, so why not follow up that effort with a similar one? Brand Stone wrote in Bloomberg Businessweek, "Amazon Prime may be the most ingenious and effective customer loyalty program in all of e-commerce, if not retail in general." Amazon Prime members spend double that of non-members. Piper Jaffray conducted a survey in 2011 which showed that 92% of members would renew their membership. With that type of loyalty, how much could Amazon grow with the AmazonFresh service?
Let's face the fact: Amazon is expensive. There is no getting around it, you will pay large amounts to buy the stock. If measured by price-to-sales, or price-to-book, Amazon is about four times as expensive as Wal-Mart. The company is still growing, and certainly hasn't reached its full potential. The past several paragraphs have shown what tremendous opportunities the company has to offer, which may be why the stock is so expensive. Its capital expenditures have increased 416% since 2010. It is putting money towards growth, and it is growing. That is what investors should want out of a company such as Amazon.
Costco and Wal-Mart are more established. Costco's free cash flow yield is 3.4%, and Wal-Mart's is 4.7%. Costco and Wal-Mart also have an earnings yield of 4.2% and 6.8% respectively. Costco's P/E ratio is 9.2 higher than Wal-Mart's, which is currently 14.7. Both of these companies offer dividends to shareholders, and have dividend yields of 1% and 2.3% respectively.
The Foolish bottom line
Amazon may be expensive, but with the efforts it is making in different areas, it should offer great growth for years to come. Could new services like AmazonFresh ever actually challenge large grocery stores like Wal-Mart? Amazon's e-commerce model has revolutionized the retail industry and is continually threatening brick and mortar stores globally. Finally, despite the expensive premium, the majority of all-star players with the Motley Fool Caps believe Amazon will perform well, and even out perform the rest of the market.
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Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!