Amazon Asks: Paper or Plastic?

Cleanup, virtual aisle four! Amazon.com (Nasdaq: AMZN  ) has just launched an online grocery store.

But wait -- before you get too excited, we aren't talking about fresh milk and frozen pizzas being rushed to your door. Not yet, anyway. No, Amazon has limited itself to stocking "more than 10,000" non-perishable items, such as diapers, breakfast cereals, and laundry detergent.

This also won't be a rerun of the ill-fated Webvan idea. Amazon isn't going with a costly, localized distribution emphasis armed with refrigerated delivery trucks. Instead, it's offering up sundry items that can be shipped out through its existing national channels. That gives the company the luxury of offering the same free Super Saver Shipping options that it reserves for smaller media, even if it means bundling items. For instance, it's selling some cereal boxes in packs of four.

This may seem familiar to some of us. I bought disposable diapers through Amazon ages ago. And three years ago, the leading online retailer began selling gourmet goods such as boxed chocolates, Starbucks (Nasdaq: SBUX  ) coffee grounds, and food baskets, often as an intermediary with third-party vendors. This new store is a logical extension of that mindset, even if its items seem to be more like what you'd find at a warehouse club than at the corner grocery.

Investors shouldn't expect a colossal windfall here. Groceries have traditionally made for low-margin turf, and chains make up for it in turnover. Leading supermarket operators such as Kroger (NYSE: KR  ) and Safeway (NYSE: SWY  ) are only afforded the luxury to mark up their wares by roughly a third of what they are buying them for. By the time all of the other expenses add up, those two grocery giants are posting operating profits and net profits of around a mere 3.5% and 1.5%, respectively.

This doesn't mean the Amazon store will be a wash, though. The real winner here should be Amazon Prime, the premium service that allows shoppers who pay $79 a year the ability to receive free two-day delivery on most items. And Amazon Grocery will complement that idea perfectly -- it will encourage existing Prime members to be wooed by the convenience of home-delivered eats for free. At the same time, it will be magnetic as it makes Prime a more compelling value to folks sitting on the fence.

So, well done, Amazon. Now I just need to find enough people to share four boxes of Frosted Flakes with.

Shares of Amazon.com were singled out to Stock Advisor subscribers three years ago. Starbucks is a more recent recommendation of the newsletter.

Longtime Fool contributor Rick Munarriz has been shopping online for about as long as Amazon.com has been in business. He was a huge fan of the grocery delivery service that Publix was running in Florida a few years ago, until it broke his heart by pulling the plug on the whole thing. He does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.