Amazon.com, Inc.’s (NASDAQ:AMZN) grocery strategy is confusing. Last year, the Wall Street Journal published a stunning report that the company was planning to open 2,000 physical grocery stores. Such a move which would have made it one of the largest operators in the country, in league with Kroger Co’s (NYSE:KR) 2,778 locations, Albertson’s 2,205 stores and the 2,000 markets owned by Ahold-Delhaize (OTCMKTS:ADRNY), corporate parent of Stop-N-Shop and Food Lion.
A few days later, AMZN stock, which is known for being secretive and didn’t comment on the Journal’s original report, released a statement indicating that it did not have plans to open “2,000 of anything. Not even close.”
Then it cryptically added: “We are still learning.” For its part, the Journal stuck to its story, adding that the Seattle-based company could open 2,000 grocery stores “depending on how its trials go.”
This raises the question over whether Amazon might open more stores. It is test marketing Amazon Go, a neighborhood market that enables shoppers to make purchases without going through a checkout line. It also is thinking of adding larger format concepts, the newspaper added.
Before getting too excited about AMZN stock over this particular initiative — especially in the wake of slightly disappointing fourth-quarter earnings — investors need to keep a few things in mind.
Fighting the Grocery Business
First, the grocery business has been the Bermuda Triangle for some of the biggest names in retail, such as Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT), which have struggled for years in the low-margin business. The higher-end of the grocery market has stagnated as evidenced by the declining profits at Whole Foods Market, Inc. (NASDAQ:WFM). I don’t know how Amazon will fare any better.
Indeed, according to eMarketer, AmazonFresh online grocery delivery service trials rivals Peapod, Fresh Direct and Instacart because it started later. Peapod is owned by Royal Ahold Delhaize, has been around for 20 years. AmazonFresh sales have been surging lately because the e-commerce giant has slashed fees. This is a familiar strategy from the Amazon playbook of sacrificing profit for revenue growth. Local grocers are offering delivery as well.
Amazon Go could be a potential game changer if it works. That’s a big “if” because if the technology doesn’t work the company’s profits will walk out the door — literally.
Even if Amazon Go can eliminate the need for cashiers, it may make more sense for the company to license the technology rather than open physical stores.
Furthermore, the incumbent grocery chains haven’t been the pushovers that some pundits had expected. Kroger’s earnings growth has outpaced its peers over the past 10 years and the chain sees “$100-plus billion in market share growth opportunities” in its existing markets. Discounter Aldi has been taking market share from bigger rivals including Walmart. Kantar Retail expects the German company’s annual U.S. sales to reach $20 billion fueled by a 33% jump in stores to 2,000.
Amazon.com, though, remains a dangerous competitor because it is swimming in cash thanks to the surge in its web services business. It can take all the time that it needs to “figure out” the vexing challenges posed by the grocery business. That’s why it’s best to avoid shares of the grocers along with other traditional retailers who are being strangled by the costs of running stores by AMZN.
The company’s grocery gambit, however, isn’t reason enough to buy AMZN stock.
As of this writing, Johnathan Berr did not hold a position in any of the aforementioned securities.