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Why Amazon.com, Inc. (AMZN) Stock Holders Should Fear Amazon Go

Amazon's newer business ideas lack the clarity and purpose of its older ones that drove AMZN stock to its heights

Never let it be said that Amazon.com, Inc. (NASDAQ:AMZN) is unwilling or unable to come up with innovative business ideas. Not every one ends up boosting the value of AMZN stock. But sometimes the spaghetti sticks to the wall.

The latest entry in Amazon’s list of wild and crazy initiatives? Amazon is getting (deeper) into the grocery business.

If it rings a bell and seems like slightly old news, that might be because the idea first surfaced a few weeks ago when the market learned the e-commerce giant aims to open as many as 2,000 grocery stores across the nation. But the newest news isn’t a rehash of that.

On Monday, AMZN unofficially unveiled a brand new grocery store called Amazon Go. It’s more of a small-footprint venue, offering basics like bread and milk, along with ready-to-heat meal kits.

These stores will also facilitate full-scale grocery shopping, allowing patrons to order those goods online.

The quirk? Customers need not pull out their wallet or purse. A simple scan of a shopper’s smartphone upon entry is all that’s required. That consumer just bags up what he/she wants to buy; computers, sensors and cameras monitor everything that gets put in the bag. There’s no checkout process, either. There’s not even a cashier — the patron simply walks out. Once out the door, Amazon’s technology sends a receipt for the purchase to that shopper’s smartphone.

It’s slick. But it’s also one idea that owners of AMZN stock might not want to get too excited about.

Amazon Go Ignores a Key Reality

In the past, I’ve been critical of some of Amazon’s initiatives. For instance, I deemed the premise of using aerial drones as a means of delivering packages a dangerous, stupid idea. And AMZN is delusional if it thinks it can brand itself as a fashion powerhouse.

Conversely, I’ve cheered the idea of Amazon’s home-grown air freight network, and the advent of Amazon bookstores is a brilliant marketing tool, even if not a profit center in and of themselves.

I only make the point to verify that I don’t hate the company, nor am I trying to bash AMZN stock, so I can say this about Amazon Go:

It is a really bad idea.

I’ll stick to my theory laid out in October that a more conventional grocery presence could be fruitful for the company. Though that idea is a “order pickup only” option, it works because everything that happens within its building is on Amazon’s terms. The customer never actually steps foot in the grocery store, allowing Amazon to operate those facilities like what they are: a warehouse/factory.

Not so with Amazon Go. Amazon Go caters (or will — it’s only in beta testing right now) to shoppers who expect a nice consumer environment. Yet the premise itself requires the full-blown grocery infrastructure. That is, deli workers to make sandwiches, stockers to keep shelves full, a cleaning crew, and of course, some sort of customer service agent on hand to help patrons resolve inevitable problems that will surface.

In other words, Amazon wants to be a grocery store without being a grocery store. It won’t work … not even on a small scale.

Indeed, the small scale of Amazon Go could be its biggest liability of all. The core to success and profitability from rivals like Kroger Co (NYSE:KR) and Wal-Mart Stores, Inc. (NYSE:WMT) is massive scale that covers their fixed costs. Amazon Go will be designed to lack that scale, yet fixed costs like payroll and utility bills will still be relatively significant.

It’s going to be tough for Amazon to actually make a buck doing business like this.

Bottom Line for AMZN Stock

Of course, there’s the distinct possibility that Amazon isn’t aiming to make Amazon Go an actual profit center. Rather, it may be another marketing tool, ultimately aimed at bringing more customers into the Amazon ecosystem, where they can then be sold other things. In that light, this foray into groceries could provide a tailwind for AMZN stock.

That’s one heck of a leap of faith from Amazon, though. It’s also an expensive one.

In the grand scheme of things, the advent of Amazon Go likely won’t matter much either way to Amazon’s top or bottom lines. And who knows? It may well be a big — and profit-bearing — hit. But the odds say that’s less than likely.

In a bigger sense, it just seems like Amazon’s newest business ideas increasingly lack the clear purpose and decided potential its older ones had.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/amazon-com-inc-amzn-stock-amazon-go/.

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