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Art instructor and mother of three Amy Frankson has cut back on her trips to Pavilions supermarket from three times a week to maybe three times a month. For the most part, her groceries — including perishables like eggs and milk — are now dropped off at her doorstep in green totes marked "AmazonFresh."
Her household used to rack up about $300 in weekly supermarket receipts from Pavilions, a Safeway chain. Now Frankson's family spends about $200 a week on groceries, and buys an estimated 85% from the Amazon's fresh-grocery home-delivery service. There's also the convenience factor.
"If I order it in the morning, it could be there by dinner time," she said from her home in Newport Beach, Calif.
Shoppers like Frankson have Wal-Mart (WMT), Kroger (KR) and others scrambling to get ahead of Amazon (AMZN). The e-commerce giant has swallowed up segment after segment of the retail business and spit out bookstores, electronics retailers and clothing chains along the way. Now Amazon hungers to pile groceries onto its plate.
And millennials, who are finally starting to form their own households, could accelerate Amazon's push into refrigerators around the world.
In fact, even as Amazon rolls out new shows on its streaming video service and new gadgets with artificial intelligence, some analysts believe everyday groceries could deliver the biggest boost to its revenue.
Amazon shares have pulled back a bit after hitting new highs earlier this month but were up 0.1% at 744.86 Friday. The stock is up 10% so far for 2016, compared with the S&P 500's 6% year-to-date gain.
Wal-Mart rose 3 cents to 73.55 on Friday, and Kroger edged up 0.1%.
IBD'S TAKE: Amazon's earnings report next week could propel the stock even higher. Here is how investors could have approached Amazon's earlier run-up and why the lowest stock price isn't always the best.
Food-Industry Market Share
For now, Amazon controls an estimated 1.1% of the $795 billion food and beverage business through various Prime offerings, including Pantry and its fresh-grocery delivery service, Fresh. Wal-Mart, including Sam's Club, leads with 21%, according to a March analysis from Cowen analysts John Blackledge and Oliver Chen. Kroger's 9% market share puts it at a distant second, and Albertson's/Safeway, Costco (COST) and Publix round out the top five with low- to mid-single-digit shares apiece.
First tested in Seattle almost a decade ago, AmazonFresh has quietly popped up since then in about a dozen cities along the coasts. They include Los Angeles, Philadelphia, San Francisco, Baltimore and New York.
A new offensive has brought Fresh back into public focus. The service recently launched in Boston and across the pond in London.
An Amazon spokesperson said the company does not comment on its product roadmap.
"We're branching out as fast as we can while being careful not to sacrifice the quality and convenience our customers expect from AmazonFresh," says Amazon's help page.
How AmazonFresh Works
To shop on AmazonFresh, customers have to sign up for Prime Fresh, a higher-tier Prime membership that costs $299 annually. At $200 more than a regular Prime subscription, the service isn't exactly cheap, but Frankson said it "definitely pays for itself."
Gen Xers like Frankson and her husband, Brian Mackerer, both 42, are contributing to growing online-grocery penetration. According to a recent Cowen analysis, 16% of surveyed 35- to 44-year-olds used such a service in February. As for millennials, the firm found that 21% of 25- to 34-year-olds had bought groceries online, with 28% pegged as "likely future buyers."
"Particularly with a younger generation, there's no desire to drive to a store and push a cart down an aisle and load heavy items and stand in line at checkout and then throw stuff in your trunk or in bags on the bus or whatever and take it home, when there are other more convenient options," Baird analyst Colin Sebastian told IBD.
Fellow tech titan Alphabet, meanwhile, has taken a different route with its Google Express service, positioning itself as a courier between residents and nearby stores like Target (TGT), Ulta Beauty (ULTA) and Walgreens Boots Alliance (WBA), rather than a direct competitor.
Cost Vs. Google Express
Google Express memberships cost $95 a year or $10 a month; nonmembers are charged $4.99 per delivery. It's available in a sprinkling of cities across the country. Cold grocery delivery is only featured in parts of Los Angeles and San Francisco.
Perhaps mercifully for legacy players with established supplier relationships and infrastructure, the complex fulfillment strategy associated with fresh food is slowing down Amazon's grocery takeover.
Handling produce and perishables is a whole different animal at an Amazon fulfillment center. There are temperature checks, quality requirements and inspections, according to an MIT report cited in Cowen's analysis. Plus, just like at the supermarket, bags have to be packed with extra care to ensure that berries are not smashed and eggs aren't cracked.
Why bother with a low-margin business that has difficult logistics?
Because people go grocery shopping about four to five times a month, and the added operating income dollars outweigh the unattractive margins, say Blackledge and Chen. Plus, it lures shoppers into Amazon's Prime ecosystem.
"For (Amazon), we think the purchase frequency fits well with the Prime value proposition and the incremental operating-income (dollars) offset the low-margin profile," they wrote, adding that Amazon will benefit from scale and logistics expertise, among other things.
That should translate to billions more dollars at the top line. The Cowen analysts estimate the U.S. food and drink market is Amazon's "biggest category for upside impact to revenue and/or" gross merchandise volume. They see the company's grocery volume shooting up to $23.2 billion five years from now from an estimated $8.7 billion this year.
Of the additional spending that goes to online food and beverage sales in the U.S. from 2016 to 2021, Blackledge and Chen think Amazon alone will capture 38% -- and that's a conservative forecast.
Longtime food suppliers to grocery stores are expected to hop on board the Amazon train as shopping habits shift, margins be damned.
"At this point, a lot of suppliers realize Amazon is absolutely a must — a channel they have to be on, even if it comes at the expense of their margins," said Morningstar analyst R.J. Hottovy. "The amount of velocity and product sales you're going to get through Amazon, you absolutely have to be a partner in some way."
When it comes to online grocery shopping, traditional grocery bigwigs are throwing everything to the wall to see what sticks, including partnerships with last-mile delivery services like Instacart or features such as in-store pickup.
"It's very clear that all of those players are looking for a solution," said Piper Jaffray analyst Sean Naughton. But which solution works best is still a mystery.
Target, Kroger, Wal-Mart Fight Back
Target (TGT) has been testing online grocery delivery in Minneapolis. Kroger shoppers can use ClickList to order online and pick up in a store, or Vitacost.com to order health foods and vitamins for home delivery. Wal-Mart offers curbside delivery pickup in dozens of markets, and has plans to expand.
Of the major players, market leader Wal-Mart "appears to be the farthest along with future-proofing, in our view, with online grocery pickup up in 20 markets now and adding an additional 22 this year," according to the Cowen report. It noted that Wal-Mart sees online grocery pickup as a "key growth strategy" for its U.S. stores and online business in fiscal 2017 and beyond.
At a Deutsche Bank consumer conference in mid-June, Wal-Mart CFO Brett Biggs sounded bullish on the company's online grocery prospects, while noting that its shoppers may in fact prefer in-store pickup over home delivery.
"(Customers) like — while they're out — being able to come pick up their groceries," he said. "So it's an area that will evolve a lot. We think we have a good competitive position where we're at, and I think it'll be a big part of our future."
Costco, on the other hand, doesn't care for the "order online, pick up in store" model. Instacart and Google Express enable home delivery of certain perishables and other items, but Costco mostly wants customers to pay its warehouses a visit.
"We don't want somebody to come by necessarily and pick it up," said CFO Richard Galanti during the company's Q2 earnings call in March. "Maybe that would change if we were having minus-3% comps in our lives. So we want to do everything possible to get them in the store and not just come and pick something up. So I don't see that as being a strategic focus of ours, at least in the near term."
Impact On Whole Foods And Sprouts
Whole Foods Market (WFM) has taken its relationship with Instacart up a notch. The specialty grocer announced in March that it would roll out in several new markets over the next year, in addition to the 17 metro areas that it already serves.
But for Whole Foods, Trader Joe's, Sprouts Farmers Market (SFM) and the like, AmazonFresh isn't the only worry.
Meal-kit services like Blue Apron and HelloFresh, which deliver pre-measured ingredients along with a recipe, are a "fast-growing market" and an "incremental headwind" to the specialty grocery space, according to Naughton. He said 25% of people who say they shop primarily at specialty grocery stores have tried home-delivery meal kits.
Indeed, Frankson said Blue Apron is "eroding" what is left of her family's need for Pavilions. She has also tried snack subscription box Graze, but said she was "not crazy about all the snacks and they just piled up."
Amazon has its nose in that, too. Tyson Foods (TSN) will debut a meal-kit delivery service, Tyson Taste Makers, in partnership with AmazonFresh later this year.
But for some people — and some foods — the in-store experience will continue to be essential.
A Nielsen global study found that 61% of poll respondents think going to a supermarket is "enjoyable and engaging," and 57% believe the act of grocery shopping is "a fun day out for the family."
Plus, people get picky about their produce.
"There's still an element of consumers wanting to touch and feel what they're buying," said Hottovy. "I think that's still the biggest hurdle for them in becoming a major disruptive player."
Frankson, however, is "very happy" with AmazonFresh's produce.
"They don't give me dodgy-looking avocados," she said.