Amazon’s (AMZN) Next Retail Buy Will Surprise You

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As the Amazon.com, Inc (NASDAQ:AMZN) business model continues to evolve, a lot of chatter revolves around the “final mile” or the “last mile” where a product’s delivery to the customer is in the homestretch.

AMZN stock

It’s the retail industry’s biggest quandary leaving many to speculate that Jeff Bezos continues to scour the U.S. for retailers that close the e-commerce loop as Whole Foods will do in the grocery space.

“When the e-commerce giant launched the on-demand delivery program in 2014, it was billed as the most convenient way to shop for household essentials and groceries,” wrote Racked contributor Hilary George-Parkin in a Sept. 26 article discussing the difficulty of delivering to rural towns. “If the weather report says a storm is coming, you can have an umbrella on your doorstep before having to venture outside — all without paying a dime in shipping fees. Of course, this is assuming you live in a city like San Francisco, Miami, or Chicago. If you happen to be in, say, rural Wyoming, you’ll find you’re out of luck.”

So true.

I recently joined Amazon Prime so that I could quickly send a birthday gift to a friend living in the Ottawa-area (Canada’s capital city). Unfortunately, they live in the outskirts of Ottawa, and it took almost a week instead of the advertised free two-day shipping that made the CAD$79.99 annual fee so enticing.

Literally, their house is a 30-minute drive to downtown Ottawa and the Parliament Buildings. So forget rural Wyoming. If you don’t live in New York or Los Angeles or Seattle or Toronto (where I live), you’re still working with the e-commerce equivalent of dial-up.

How AMZN Will Close the Loop

Amazon’s ultimate goal is to be able to deliver as many products as possible to as many people as possible as quickly as and inexpensively as possible. Successfully achieving this goal will continue to push AMZN stock higher.

As I described above, the big cities aren’t the problem although they too have a final mile dilemma which AMZN is solving by building Prime Now warehouses the size of grocery stores in urban areas near customers that act as fulfillment centers. The acquisition of Whole Foods simply adds 430 additional locations it can use as urban and suburban delivery hubs.

However, that doesn’t solve the problem outside the suburbs, in the exurbs and beyond. To get to the 300 top metropolitan statistical areas (MSAs) in America, Amazon’s got to go brick and mortar.

According to the Census Bureau, the 300th-largest MSA in 2016 was Battle Creek, Michigan, with a population of 134,386.

I believe Amazon’s next retail buy will be a company that operates one or more stores in or very near to Battle Creek.

The winner is?

E-commerce at Costco Wholesale Corporation (NASDAQ:COST) is the weakest link in a powerful chain. Currently, its online sales account for just 4% of its overall revenue. Late to the game, although it has a plan, Amazon could sure that up.

Costco and Amazon have a lot more in common than you realize. One of the biggest similarities being they both have annual memberships. Priced around the same amount, Amazon uses Prime as a loss leader while Costco uses it as its prime profit center.

But probably the biggest similarity is the companies’ customers. According to Kantar Retail, 50% of Costco’s members are also AMZN Prime members, up from 14% five years ago.

Could you get any more similar? Well, Whole Foods, perhaps, but you get my point.

Amazon brings e-commerce expertise to the table which Costco needs while the warehouse club’s perfected the art of keeping prices low by always pushing suppliers to do better.

Although Costco doesn’t have a store right in Battle Creek, it does have one in Kalamazoo, a short half-hour drive west, which is close enough in my books.

The best part of an AMZN-COST tie-up? They’re both based in Seattle making negotiations a lot more convenient.

I don’t know the exact extent of Amazon’s borrowing capacity but I’m guessing the banks would line up to finance a deal. Whether the government would allow a deal to happen is a much trickier answer.

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/amzn-stock-retail-buy/.

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