It’s no big secret Amazon.com, Inc. (NASDAQ:AMZN) is interested in getting deeper into the grocery business. It has been doing grocery deliveries for a while, and just a few weeks ago it was revealed the company was envisioning opening its own network of 2,000 grocery stores across the nation.
While long-term owners of Amazon stock are more than used to big, bold growth initiatives from the company, the news still raised eyebrows. Food is very much out of the company’s wheelhouse, and besides, groceries are a low-margin, low-growth business.
Thing is, Amazon’s grocery business isn’t about selling groceries. It’s about developing yet another connection with consumers, tightening the hold Amazon has on the entirely of consumers’ lives.
It’s Not About Selling Food for Amazon
Amazon stock holders who don’t expect groceries to be a big boost to the bottom line aren’t wrong — they won’t. But, that was never the point.
At its inception, an investment in Amazon stock was an investment in an e-commerce name that focused on books, DVDs and small electronics. That’s not what it is anymore though. While it took almost a couple decades to get there, an investment in AMZN is an investment in a lifestyle company.
That is to say, CEO Jeff Bezos doesn’t want to serve you. Bezos wants Amazon to be one of the cornerstones of your daily living. Being a food middleman is one effective way of making the company at least one of your social/economic/digital centerpieces.
Figuring out how to best monetize those initiatives can come later; profits are secondary.
The vision, however, came well before the realization of that vision did.
Giving credit where it’s due, the New Yorker‘s George Packer said it best in his 2014 paraphrasing of Roger Doeren’s (COO of Rainy Day Books) first encounter with Jeff Bezos at a book-publishing convention. Packer recollects Doeren’s understanding at the time:
“Bezos said that Amazon intended to sell books as a way of gathering data on affluent, educated shoppers. The books would be priced close to cost, in order to increase sales volume. After collecting data on millions of customers, Amazon could figure out how to sell everything else dirt cheap on the Internet.”
Twenty years later, that’s exactly how things have panned out.
AMZN Stock’s Plans Well Underway
It’s not as if grocery stores are the company’s first stab at doing something so it can do something else. The Kindle Fire wasn’t about selling consumers a tablet. Indeed, it was widely (and probably accurately) speculated that Amazon lost money on the Fire. It didn’t matter. It was about putting a device in consumers’ hands that made it very easy for them to download a pay-per-view television show or movie from Amazon’s digital library.
Ditto for its brick-and-mortar bookstore ambitions.
Books are apt to be the least important aspect of those retail locales … however many there are going to end up being. Those bookstores will be a way of showcasing everything else Amazon offers. They’ll be a way for actual salespeople to demonstrate the value of Amazon Prime to consumers that chose, perhaps, to pick up an item ordered online that would have incurred a hefty shipping had it been shipped directly to the customer’s residence.
In the meantime, the virtual concierge known as Echo sits right in the middle of a few million people’s living rooms, ready to answer any question its owner may have, and place any order that customer may wish to place with Amazon.com.
And now, groceries.
As was noted, the company doesn’t even exactly know what this division is going to look like when all is said and done. CFO Brian Olsavsky acknowledged during the company’s third quarter conference call, “Groceries are a key part of our offerings to customers and we’re playing with very different models to see which works and for what needs.”
The key is just establishing a new consumer connection, or strengthening an existing one.
Bottom Line for Amazon Stock
So, Amazon stock holders who are concerned the company is getting too far off the beaten path, take heart. There’s a method to the madness. While margins in the grocery business are typically thin — and may be even thinner for Amazon — Amazon’s got a myriad of other ways to monetize the information it gathers from, and about, those customers.
The fact that not even Amazon even knows what it’s going to look like doesn’t really matter.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
