Markets

Amazon May Have Finally Cracked This Huge Retail Category

Every time Amazon (NASDAQ: AMZN) reports earnings results, it writes a laundry list of its business highlights from the previous quarter. In the fourth quarter, one of the highlights involved Amazon Fresh, the company's grocery delivery platform, and Whole Foods, the grocer it acquired in 2017.

The announcement

Amazon's press release on its fourth-quarter results included the following highlight from the quarter:

Amazon announced that delivery through Amazon Fresh, which was previously $14.99 a month, is now a free benefit for Prime members. Members in more than 2,000 U.S. cities and towns can access free two-hour grocery delivery from Amazon Fresh and Whole Foods Market. Grocery delivery orders from Amazon Fresh and Whole Foods Market more than doubled in the fourth quarter year over year.

Amazon is well-known for its practice of continuously working to lower prices and making its services more accessible to more people. For example, it once had a $49 minimum order size for non-Prime members to qualify for free shipping. Over the years, it reduced that minimum to $35 and again to $25, where it stands today.

Similarly, Amazon Prime was once only available as an annual subscription, but there are now cheaper monthly and student plans as well. The objective of all this is to lower the barriers to being a frequent Amazon customer because that grows order volumes. And larger order volumes create all sorts of benefits for the company: better bargaining power with suppliers, better utilization of the fulfillment-center network, better utilization of the company's shipping and logistics assets, and more wallet share and mindshare among consumers. All of that leads to a larger, more profitable business over time.

A delivery person delivering groceries.

Image source: Getty Images.

What it means

This new benefit involving Amazon Fresh and Whole Foods has the potential to be a meaningful driver of growth for Amazon's grocery business. The average American drives less than four miles to do grocery shopping. That limits the reach of Whole Foods to a fairly small radius surrounding each of its stores, which totaled 448 in the U.S. the last time the number was disclosed.

But free two-hour delivery with Prime significantly expands the total addressable opportunity, because Amazon is willing to deliver to far greater distances than that from its stores. For example, I received a delivery order from a Whole Foods store that is more than eight miles away. After entering delivery addresses increasingly farther from a Whole Foods store, it appears Amazon is willing to deliver groceries up to about 20 miles from a Whole Foods location.

Twenty miles is significantly farther than the average consumer is willing to drive to a grocery store, even a high-quality one like Whole Foods. As a result, I believe the addressable market opportunity for Whole Foods just grew massively. When you throw in the amazing convenience of free delivery straight to consumers' doors, and the significant time savings that offers them, it seems likely Amazon's grocery business is finally going to take off in line with its long-held ambitions.

Why it matters

The grocery channel represents a massive market in the U.S. According to the U.S. Census Bureau, retail sales at grocery stores totaled $695 billion last year. For context, that's almost 13% of all retail sales. Grocery-store sales are only slightly smaller than those in the entire general-merchandise retail category, which totaled $713 billion, and includes department stores, club stores, big-box retail stores, and similar outlets. Clearly, grocery is a huge opportunity, which explains why Amazon has been trying to crack it for well over a decade.

According to Brad Stone's book The Everything Store, Amazon's founder and CEO Jeff Bezos often said early on: "In order to be a two-hundred-billion-dollar company, we've got to learn how to sell clothes and food." Census figures show clothing only accounted for $268 billion of sales last year, so grocery is the far larger target. That's why it's not surprising that the company has been relentlessly testing Amazon Fresh strategies, spent $13.7 billion to acquire Whole Foods, and developed the Amazon GO store and its "just walk out" technology.

Clearly, Amazon is focusing intently on the massive grocery category, and its recent announcement of free two-hour delivery from Amazon Fresh and Whole Foods should be the start of something big. Investors should focus just as intently on these developments.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andrew Tseng owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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