Amazon: A Major Move Means No Retailer Is Safe

Dec.13.13 | About: Amazon.com, Inc. (AMZN)

Ill admit it. I was one of the unsuccessful shorts in Amazon (NASDAQ:AMZN) as I believed the company was grossly overvalued and would eventually fall to Earth. After shorting it unsuccessfully at $150, $225 and $275, I turned to the "dark side" and went long at $290. I've since recouped those losses. I haven't written an article specifically about AMZN here for Seeking Alpha, but I feel compelled to share with you a reason that is breaking news for this company, at least from my standpoint. No it's not holiday sales (although I've done 90% of my personal shopping on Amazon's website and am a faithful Prime member). It's not a short squeeze that is going to propel the stock over $400. This time, its something very different, and I can confidently say that no retailer is safe from Amazon's reach.

AMZN will not be undersold. That's the beauty of this company. Now, they are going to take on warehouse shops like Costco (NASDAQ:COST), BJ's wholesale and Sam's Club. That is impressive. According to an article I read on the USA Today website, AMZN is about to unleash a new program that will encourage you to do your bulk shopping from the comfort of your couch, rather than go out and fight the masses. The potential of this move cannot be understated as a shareholder. It's a wow moment in AMZN's history. Let me say, I am intrigued, and would be a willing participant. Who doesn't want bulk toilet paper, paper towels, dog food etc? It's a burden to go out and about, wasting gas at $3.50 a gallon. This niche could fit AMZN well. With online shopping becoming a larger part of retailer sales, AMZN is taking steps to further ensure it cannot be undersold.

So how is AMZN going to compete with the giant warehouse club stores, like Costco, BJ's and Sam's Club? AMZN is in the process of developing a new business division that will allow users to order big boxes of grocery store goods, paper products etc for a fixed shipping price. AMZN will reportedly refer to the service as Amazon Pantry. You can bank on the fact that existing prime members will get first crack at the program and likely receive trials, discounts to sign up etc. Pantry is schedule to launch in late 2014 and to start will include somewhere in the neighborhood of 2,000 products. It wont just bulk paper and food but will include cleaning supplies, home supplies, canned goods and yes dry grocery items like cereal. E-commerce shoppers on AMZN's Pantry site will be able stock their digital carts with a predetermined sized box (to reduce shipping costs for the size and weight) with as many of the offered goods as can be fit. Extra charges will apply for those goods exceeding the maximum weight limit. There will be a small fee for the shipping service, and will likely come at a huge discount for Prime members.

This service is a critical move for the company. This will allow AMZN to claim market share in the packaged food market. However, it has been difficult for AMZN to penetrate this sector of retail because the cost of shipping individual items generally exceeds the price it can ask for those items. Let us take for example a 30 pack of Coca-Cola. It may retail around $8.99 or so. For a prime member, shipping is free. However, the cost of the soda would be far less than the cost of shipping the case of soda which weighs around 20 pounds. AMZN, which has lost many quarters, simply could not afford to eat this loss. Having this Pantry service would make it more economical for Amazon to deliver packaged foods in bulk to customers.

Thus far, about four fulfillment centers will partake in the Pantry service. It will be a "beta" program for a while, but if it takes off, estimating the anticipated revenue will be challenging. Needless to say, with Costco having $97 billion in sales last year, if AMZN can grab 10% of this, they are looking at $10 billion in revenue alone. Factor in sales at BJ and Sam's Club and assume AMZN gets anywhere from 1% to 10% of market share in this sector, Pantry's first full year of operation could roughly generate $3 to $30 billion in sales overall. Therefore, this move has the potential to be huge for shareholders of AMZN.

Disclosure: I am long AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.