Amazon.com, Inc. (NASDAQ:AMZN) is making a major run at Wal-Mart Stores, Inc. (NYSE:WMT) for grocery store supremacy, as Amazon lets slip documents revealing the company’s intent to open up to 2,000 grocery stores across the nation.
The plan, according to Business Insider, is for Amazon to run a pilot program for its Amazon Fresh grocery stores in 20 locations by the end of 2018.
Potential locations include Seattle, Las Vegas, New York, Miami and the Bay Area.
In the pilot program, AMZN will market test various store prototypes, which range from so-called “click-and-collect” stores, where consumers can casually pick up online orders, to your garden-variety grocery stores. The quick pick-up locations are speculated to be 10,000 square feet, while its grocery stores may occupy three times as much space. The Seattle-based retailer will experiment with ten of each prototype.
This firmly squares AMZN up against entrenched supermarket behemoths like Walmart, Costco Wholesale Corporation (NASDAQ:COST) and Target Corporation (NYSE:TGT). And it’s not going to be cheap.
What This Means for Amazon Stock
The market reaction to the news is relatively muted for Amazon stock, but it’s clear that investors need more specificity, which will likely come when AMZN reports earnings tonight after the close. The company has made moves into the physical space for some time now, and the benefits of which may already be priced in Amazon stock. Prior to this, Amazon experimented with physical bookstores and even pop-up shops in malls.
At $800 billion, the grocery market is the biggest shopping category in the U.S., but it’s going to be costly for AMZN. But with $7 billion in free cash flow over the last 12 months and more than twice as much cash as Walmart on its books, Amazon can certainly afford it. It’s not clear yet, however, whether AMZN will open the stores to the general public or limit access to its Prime Fresh club for a $15 monthly fee. By charging a fee, Amazon could offset the cost of opening and running 2,000-plus stores.
But, as Business Insider notes, the plan depends on the success of the pilot program, and the number of stores it opens in the next 10 years is subject to change. According to the internal documents, AMZN would ideally open 200 stores a year.
While Walmart offers more than 11,000 stores around the world, Amazon’s strategy isn’t necessarily dependant on strength in numbers. Much like Walt Disney Co (NYSE:DIS), AMZN would likely attempt to be a destination, attracting shoppers from out of town who want a shopping experience out of the ordinary. Its brand is already among the top global brands, edging Walmart out by three spots. Walmart, for its part, recently bought Jet.com in a bid to increase its online sales.
Amazon stock briefly spiked at the open Thursday morning, but is now coming back down to Earth. Meanwhile, WMT stock is up about 0.5%.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
