Do Amazon's Grocery Plans Make Sense?

| About:, Inc. (AMZN)
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Ask any Amazon (NASDAQ:AMZN) competitor about the strategies they use and they'll tell you that the company is a big bully. Competing with Wal-Mart (NYSE:WMT) and its low prices is one thing, but when you face a company of Amazon's size that does not seem to care about losing money for several years on certain segments, it can become very tricky to compete. Time after time, Amazon has entered areas, offering extremely low prices in order to weaken and eventually eliminate competitors. Since the company does not break down its financials much, it's difficult to say how bad it is. But there's no doubt that Amazon is ready to lose money in order to advance its long-term goals.

Already, Amazon has been a major force in getting companies such as Barnes & Nobles (NYSE:BKS), Best Buy (NYSE:BBY) and so many others to go further down the road to bankruptcy. There are few public companies willing to take such a long-term view, and I'd argue that perhaps none takes it as far as Amazon. Is the company making money selling its Kindle devices? Most analysts strongly doubt it.

In Come Groceries

Amazon has been running AmazonFresh, a grocery delivery service for a few years now and is apparently ready to start scaling to other regions in the U.S. and abroad. On the surface, it doesn't look like a very attractive business:

  • Margins are already low
  • Many established competitors
  • Keeping and delivering "fresh" food will be a challenge
  • Such a local service that it will require warehouses in many more locations
  • Will require dealing with thousands of local producers (as opposed to dealing with a few international companies)

Of course, if you know how brilliant Jeff Bezos is, it makes sense to figure out why he could be doing it. As others have pointed out -- and I've argued in my article about owning Amazon as a long-term play -- the main competitive advantage that Amazon has revolves around its warehouse, distribution, and sales process, which is as streamlined and efficient as you'll find. Google (NASDAQ:GOOG) and a few others are looking at competing, but I just don't see that happening -- at least not anytime soon. But if Google wants to build on that advantage, it needs to make sure that more users use it more frequently. The best way, of course, is venturing into areas such as groceries where scale matters, where others will not venture because the margins are too low, and where consumers spend a significant amount of money every month.

Impact of AmazonFresh's Expansion

I don't think there will be much impact on earnings and revenues from the AmazonFresh expansion, but it will give us a better look into what Amazon's long-term strategy is -- which will be incredibly fascinating.

Disclaimer: No position in AMZN.