Amazon's Doubling Down on Grocery Delivery

Amazon (NASDAQ: AMZN) just added a new perk to its Prime membership: free AmazonFresh grocery delivery. The service previously cost $14.99 per month on top of a Prime membership. AmazonFresh offers a selection of more mainstream products complementary to Whole Foods' higher-priced organic offerings. Providing access to the broader product selection with lower-priced options could give Amazon a boost in its battle against Instacart, Walmart (NYSE: WMT), Target, and other brick-and-mortar grocery stores.

A direct response to the competition

Last month, Walmart introduced a new subscription service, Delivery Unlimited, that will offer unlimited same-day fresh and frozen grocery delivery for $98 per year. That price is in line with Target's Shipt service, which offers same-day grocery delivery from Target and several other local stores. Ultimately, Walmart's head of U.S. e-commerce sees Delivery Unlimited expanding to general merchandise delivery, which could pose a much bigger threat to Amazon Prime.

A brown paper bag with the Prime logo surrounded by groceries.

Image source: Amazon.

Delivery Unlimited successfully motivated Amazon to offer its Prime members a selection of grocery products with broader price appeal. Walmart's grocery prices are considerably lower than the average cart at Whole Foods (or just about anywhere else, for that matter). For Amazon to win grocery sales, it needs to be more competitive on price, which is what AmazonFresh's product selection offers.

For now, however, AmazonFresh remains relatively limited in geographic reach. The company says over 2,000 cities and towns now have access to delivery through AmazonFresh or Whole Foods, but it only offered AmazonFresh in 21 metropolitan areas before announcing it's dropping the subscription price. Additionally, customers that haven't previously ordered groceries through AmazonFresh or Prime Now with Whole Foods will have to wait for access to AmazonFresh.

By comparison, Walmart expects Delivery Unlimited to reach 50% of the U.S. population by the end of the year. That puts it at a considerable advantage in a lot of markets where Amazon's grocery delivery options are either limited or nonexistent. The economics work out a lot better for Walmart, too, because it can deliver items from its stores and sees overlapping operations between grocery delivery and curbside pickup.

Another big fulfillment expense for Amazon

The move into more grocery delivery coincides with Amazon's ongoing push into one-day delivery for Prime orders through its online marketplace. CFO Brian Olsavsky told investors to expect a $1.5 billion "penalty" in the fourth quarter as it continues to spend on its fulfillment network and capacity to meet one-day shipping demand.

Amazon will likewise see a penalty for grocery delivery. Not only will dropping the subscription price for AmazonFresh negatively impact its subscription revenue line item, but the expansion to all Prime members will likely lead to greater demand and greater fulfillment expenses. Last quarter, fulfillment expenses climbed 23% year over year. That may accelerate in Q4.

But the long-term opportunity is great for both instances. Amazon is more likely to win sales where consumers would've normally made a run to the store -- whether for batteries or bananas.

The growth in online grocery sales is expected to move higher as 2019 seems to have been the tipping point for consumers. The percentage of U.S. internet users regularly purchasing groceries online grew from 17% last year to 37% this year, according to a survey from TABS Analytics reported by eMarketer. The research group expects online grocery sales to nearly double from 2019 to 2023, topping $38 billion.

Amazon may be giving up revenue and spending a lot of money today to expand and speed up its delivery service, but it's made similar investments in the past with great success. Considering the aggressive moves from competitors like Walmart, Amazon needs to turn more aggressive to stake its claim in online grocery and generate value from its Whole Foods acquisition.

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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. Adam Levy 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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