Amazon (AMZN) started as the “Earth’s largest bookstore,” but has evolved into the Earth’s largest everything store. Amazon stocks its warehouses with shoes, TVs, diapers, digital movies for download … you name it.
But AMZN isn’t content to stop there in its endless drive for a share of where consumers spend their money. The biggest effort lately for Amazon stock has been “consumer packaged goods,” which include food and household items that are typically sold quickly and in high volume but at very low costs and profit margins.
Dubbed Amazon Fresh, the program is only available in Seattle and Los Angeles areas right now. But it’s clearly not designed to be a quirky little side project.
If AMZN can succeed in finding enough consumers to make the service profitable, expect Amazon Fresh to roll out at scale in a neighborhood near you very soon.
AMZN and Grocery Sales – Using Its User Base
The power of Amazon is that once people get hooked, they can typically be served up other offers on related products. Think of AMZN as the ultimate upsell: In the market for a new flat-screen TV? Well, here are some movies you may like based on your history … or a DVD player … or, heck, even a new table to put it on.
And it’s not just intuitive add-ons that get you. Amazon is, at its heart, a tech play with a host of digital tools that make it much more than a simple retailer. The ability for AMZN to track your purchase history and suggest impulse buys specific to you is uncanny — not to mention the ease of use with Amazon.com when you have stored shipping information and “one-click” purchasing power.
Bake in a group of 10 million superusers with its Amazon Prime premium service — some of whom buy almost everything from AMZN — and you have a platform for massive wallet share.
Amazon Fresh may be able to tap into a U.S. consumer packaged goods market worth at least $220 billion, according to analysts. Just a small sliver of that pie will be significant to Amazon and AMZN stock investors if the Amazon Fresh plan reaches fruition.
Furthermore, a Bernstein Research survey indicates that the key factors for consumer packaged goods sales are “pricing, specialized/niche brand selection and delivery convenience” — three things that Amazon does in spades, and that other grocery retailers may not be able to compete with.
It all adds up to a big opportunity for AMZN investors.
What About AMZN Margins?
Of course, the million-dollar question is how Amazon can subsist by selling everything at razor-thin profit margins. Part of the appeal isn’t just the convenience and scale of AMZN, but also the low prices that the e-commerce giant offers.
Amazon obviously has a step up on brick-and-mortar retailers thanks to massive warehouses in centralized locations rather than a host of commercial real estate properties with all the staff and upkeep that comes with them.
However, 2013 saw the dawn of taxes across the board on all Amazon.com purchases — a small but meaningful increase in costs — and competitors from Best Buy (BBY) to Walmart (WMT) continue to match prices or push customers towards their own e-commerce engines as a way to fend off AMZN.
With a forward price-to-earnings ratio of over 100 and a long history of investing almost all of its profits in growth, some investors joke that Amazon is the largest nonprofit organization in the world.
But all jokes aside, it’s worth noting that the grocery business is one segment of the retail space that is notoriously unprofitable for everyone — whether it be front-of-store sales at Walgreen (WAG) or chips and soda at Safeway (SWY), the need to discount everything and turn over inventory quickly leads to a volume game where merchants at best pinch nickels instead of pennies along the way.
Given Amazon’s pedigree in the low-margin sales game and given that fresh food is a $50 billion business, it may only take the will and the logistics for AMZN to be a huge player in this marketplace.
And judging by Amazon Fresh, the will is there … and the logistics are being rolled out quickly.
Related Reading on Amazon Fresh and AMZN
- Some say Amazon Fresh could be “highly profitable.” (USA Today)
- Amazon Prime is 10 million strong — as of this spring — and growing. (CNet)
- The official Amazon Fresh website, if you want to learn more (fresh.amazon.com)
- How AMZN exec Jeff Bezos is taking over — well, has already taken over — internet retail. (Fast Company)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.