Amazon (AMZN) has its hands in a lot of pies. In addition to its popular online marketplace, the Seattle-based company also offers streaming video (i.e. Amazon Instant Video), e-readers (i.e. Kindles), a Groupon (GRPN)-like service for local deals (i.e. Amazon Local) and, most recently, the grocery delivery service Amazon Fresh.
The online shopping giant has been pilot testing the service in its hometown for a while now; the company is planning to debut the service in major markets over the next couple years. According to Reuters, Amazon Fresh will launch in Los Angeles soon and in the San Francisco Bay Area later this year. In 2014, it could be available in 20 more urban markets, including possibly some locations outside the US.
Reuters continues, "Amazon's expansion plans are a potential threat to grocery chains such as Kroger Co. (KR), Safeway Inc (SWY) and Whole Foods Market (WFM), as well as general-merchandise retailers Wal-Mart Stores Inc (WMT) and Target Corp (TGT), which also sell a lot of groceries."
Bill Bishop, a chief architect at consulting firm Brick Meets Click, echoed Reuters concerns. "Amazon has been testing this for years and now it's time for them to harvest what they've learned by expanding outside Seattle," said Bishop. "The fear is that grocery is a loss leader and Amazon will make a profit on sales of other products ordered online at the same time. That's an awesomely scary prospect for the grocery business."
Maybe so, but I doubt you are going to see supermarket chains take the same sort of hit Barnes & Noble (BKS) did when Amazon started to sell books at a discount.
There is one simple reason -- cost.
As someone who lives in Seattle, I'm very familiar with the service and I know a lot of people who use it. Take it from a local -- middle of the range supermarket chains Safeway and Kroger do not have anything to worry about and discount retailers like Wal-Mart and Target are certainly exempt. It only takes a brief look at Amazon Fresh's website to see that the company is not trying to compete on price.
Let's say you wanted to buy hearts of romaine. If you went through Amazon Fresh, you have three choices, all organic and all ranging in price from $4.79 to $4.89. Safeway also offers grocery delivery and sells hearts of romaine. There, you would spend $4.00 for organic romaine hearts and $3.29 for not organic. Kroger doesn't offer grocery delivery, nor does Whole Foods, Wal-Mart, or Target.
In other words, if you need to have your groceries delivered, which is a major convenience when you live in an urban area -- if for no other reason than someone else gets to lug all the bags up your walk-up -- and price was your main concern you wouldn't be using Amazon Fresh.
Now, if organic is your thing and supermarket organics don't quite meet your tastes -- that is a different story altogether. Then, you are left with three choices. Order from Amazon Fresh or find your way to a Whole Foods or Trader Joe's. If you need the convenience of delivery and you want organic or hard to find foods, such as gluten free or international cuisine, Amazon Fresh is your only choice.
As such, there is a very real risk that Amazon Fresh will impact Whole Food's business, but it is going to take at least a year for Amazon Fresh to establish enough of a presence to impact Whole Foods stock by anything more than momentum from investor fears.
Whole Foods is currently trading at $50.68 on a 52-week range of $40.70 to $53.60. The Austin-based company, which has been around since the 1970's, had 349 stores as of May 7, 2013. Analysts give Whole Foods a one-year target estimate of $51.78 -- a return of roughly 3% counting the organic grocery retailer's 0.80% dividend yield. The company has been seeing modest increasing in its operating statistics -- its number of stores is up almost 9% and its average income per square foot is up almost 11% -- but this isn't a stock that is going to pop.
With its modest projected growth in share price and the impending threat of Amazon Fresh, investors would be better off jumping ship -- there are better places to invest your money, Amazon included.
In comparison, Amazon is trading at $266.80 on a 52-week range of $212.56 to $284.72. The company carries a one-year target estimate of $313.82 -- or a return of nearly 18%.
Just under 60% of Amazon's business is in North America and only 5% of its operations come from sources other than media (which accounts for 31.5% of its revenue) and electronics and other merchandise (which account for roughly 63.5%) -- which means that while Amazon has a strong footing in media and merchandise, the other category, which is where grocery would fall, is a largely untapped section for Amazon. Given that the US grocery industry weighs in around $585 billion, the potential for upside is huge.
Amazon is going to have to spend some money for its Amazon Fresh service to gain a footing, but even with all its expenditures, the consensus is that investors buying in now would earn almost 18% over the next year. Once Amazon Fresh is launched nationally, that return will likely be even higher.