Amazon's next target: The place where you do 20% of your spending.
Selling groceries is a horrible business. Competition is stiff. Margins are tight. And it’s heavily capital intensive.
You’d be excused, in other words, for wondering why a company like Amazon.com AMAZON.COM INC. AMZN 1.5955% is so intent on not only selling groceries, but on delivering them to your doorstep the same day you order them.
I’m referring to AmazonFresh, the e-commerce giant’s grocery-delivery subsidiary. Launched in Seattle in 2007, the service has now expanded to include Los Angeles, San Francisco, and New York City.
While perplexing, my guess is that the source of Amazon’s interest is actually quite simple. Namely, aside from sales of general merchandise, groceries make up the next largest category of retail sales excluding car sales.
In 2013, total grocery sales in the United States added up to $580 billion. By contrast, sales of general merchandise (Amazon’s bread and butter) totaled $653 billion. Meanwhile, the third-largest category, building materials and garden equipment, came in at $312 billion.
On a percentage basis, this means that nearly 20% of all domestic retail sales are associated with groceries. Thus, for a company that aspires to be the “everything store,” it seems obvious they’re a necessary offering.
It’s worth noting, moreover, that Amazon’s desire to tap into the grocery business fits snugly into its emerging business model, which is in the process of fundamentally altering the retail landscape as we know it.
Over the last five years, the Seattle-based company has accelerated the construction of fulfillment centers across the United States. At present, it now has mammoth facilities perched on the outskirts of nearly every major metropolitan area in the country, including New York City, Chicago, and Los Angeles.
Aside from reducing the time it takes to dispatch goods from warehouses to customers, this positions Amazon to wage a direct assault on a host of once-sheltered brick-and-mortar retailers.
Large appliances serve as a perfect example. When Amazon only operated a handful of fulfillment centers in places like Kentucky, Delaware, Indiana, and Washington, it wasn’t feasible to ship a refrigerator to a customer in Dallas. But now that Amazon has a 1-million-square-foot facility in neighboring Fort Worth, that barrier has largely been eliminated.
It stands to reason that any retailer even remotely vulnerable to disruption is now within Amazon’s crosshairs. And first and foremost among these are businesses like grocery stores that shoulder the expense of owning or leasing high-priced real estate in densely populated areas.
Does this mean grocery stores will soon go the way of the dodo bird? No, not completely at least, as Amazon’s ability to generate a reasonable rate of return from AmazonFresh remains to be seen. At the same time, it doesn’t require an extraordinary leap of faith to assume that Amazon will find a way to crack this nut and begin devouring yet another large category of retail sales.
