Costco (COST) may want to start taking a longer, detailed look over its shoulder. Ditto for Walmart (WMT), or at least ditto for Walmart’s warehouse shopping arm, Sam’s Club. There’s a new name coming to the bulk-buying arena, and it’s coming from an unexpected direction — the online world.
That’s right, Amazon (AMZN) is finally taking dead aim at WMT and COST where they’ve both dominated for a long time … right in your kitchen and cupboard. AMZN will launch its brilliantly named Amazon Pantry site sometime in 2014, delivering everything from Froot Loops to Windex right to your doorstep.
The knee-jerk assumption may be that more products mean more profit for Amazon. But on second thought, it’s difficult to be all things to all people, particularly in a low-margin business like groceries and cleanings.
To be fair, both theories have their merits. However, there’s a third, more advanced theory regarding Amazon’s thinking here, which makes the Amazon Pantry premise very encouraging.
Consumers are now so busy and so distracted by life that a relatively benign chore — swinging by the grocery store — has become one giant pain. Letting the UPS guy simply drop off that toothpaste and dog food and other packaged goods is a welcome relief for folks who now officially have better things to do than shop.
Home Amazon Pantry Will Work
Amazon recognizes that in order for the Pantry venture to payoff, relative shipping costs will be the key to the service’s marketability. For example, delivery costs on just one box of dryer sheets could cost more than the dryer sheets themselves, but it’s unlikely any customer would truly want a single case of dryer sheets, even if that size of order is the most economical on a per-sheet basis.
The right cost/practicality balance will largely lie in the size of the box being used to package the goods. Amazon Pantry intends to use just one size of box for orders, allowing the customer to fill it as full as they want, provided it doesn’t exceed a weight limit. There’s still a per-box shipping fee, but presumably, any delivery costs Amazon may have to eat would at least be offset by the profits garnered on the sale of the items in the box.
The company also realizes that the selection of packaged goods in Amazon Pantry must be wide enough to meet most reasonable needs, but not so wide that the number of products becomes overwhelming to manage. All told, Pantry will offer approximately 2,000 items, which should cover all the basics needed by most consumers, but might wisely omit the specialty items and sizes that only a small number of shoppers ever actually want.
But AMZN stock owners aren’t as concerned with the math or logistics as they are about the size of the opportunity.
Packaged Goods Are a Big Business
If there’s any doubt that Amazon Pantry is at least a compelling possibility, one number should erase that doubt: $850 billion. That’s how much is spent on packaged goods every year in the United States alone.
For the sake of comparison, Amazon generated $70 billion in revenue last year, selling non-consumable goods like books, electronics, toys, and tools, just to name a few. Even capturing a small fraction of that total $850 billion market could mean a serious sales bump-up for the e-commerce company. So yes, Walmart (via Sam’s Club) and Costco do have something to worry about.
For perspective, Sam’s Club drove $54 billion in sales for Walmart last year, and Costco’s top line in its most recently completes fiscal year was a whopping $105.1 billion; those two biggest names in consumer packaged goods clearly have the most to lose if Amazon Pantry takes off.
And that’s the big question … will it work well enough to be worth Amazon’s effort? Some consumers still like to physically go to a store and lay their eyes and hands on packaged goods before purchasing them. Even those who hate to shop might still view physical retailers as a necessary evil — better than waiting a day or two for deodorant to arrive.
However, that’s a quickly shrinking segment of consumers. Unless Walmart and Sam’s Club can make shopping semi-enjoyable again (which doesn’t appear likely anytime soon), Amazon Pantry has a lot of opportunity.
Pantry alone isn’t enough of a reason to own AMZN stock, but for anyone on the fence, it’s one more argument in favor of Amazon’s bright future.
Oh, and for the record, Jeff Reeves called it more than a year ago. 
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.