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Amazon.com (NASDAQ: AMZN ) can't seem to stay out of the news this week. In its latest push for world domination, the e-tailer is expanding its fresh grocery business outside of its hometown Seattle. AmazonFresh, as it's called, will soon offer same-day or next-day delivery of groceries in Los Angeles and the San Francisco Bay area, according to Reuters. However, will the low-margin business of food actually hurt Amazon stock in the long run?
Playing it smart
Amazon seems to be spreading itself thin these days. From its digital streaming service and endless e-commerce sites to its cloud-computing business, the world's largest online retailer covers a lot of ground. Now the company is adding fresh produce and meat to its offerings. Yet if Amazon hopes to make real profits in this category it will need to sell more than mere groceries.
This is a lesson that other retailers including Wal-Mart and Target know well. Target expanded into groceries behind Wal-Mart, as a way to position its store as a one-stop shop. This works for Target because the thinner margins of fresh produce are often offset by other purchases customers make when they're in a Target store.
Amazon could be taking a similar approach with its new fresh-produce offering. That's because AmazonFresh customers can simultaneously purchase other higher-margin products to be delivered along with their grocery orders. Not to mention, new AmazonFresh warehouses are said to feature refrigerated areas for keeping food cold, as well as traditional storage areas for other products, according to Reuters.
Why it could be a huge win for Amazon stock
This could be another growth catalyst for Amazon and its stock if the service takes off in these new markets. In fact, Amazon already plans to develop AmazonFresh in 20 more markets next year. Moreover, Amazon's thriving logistics business and distribution infrastructure should help the company succeed where others have failed.
Amazon stock could benefit down the road if the e-tailer were to expand AmazonFresh on a national level. One of the ways it could do this would be to acquire a smaller grocery delivery service, such as FreshDirect or Peapod. In the end, Amazon is doing what it does best: investing in its future.
Everyone knows Amazon is the king of the retail world right now, but at its sky-high valuation, most investors are worried it's the company's share price that will get knocked down instead of competitors'. The Motley Fool's premium report will tell you what's driving the company's growth, and fill you in on reasons to buy and reasons to sell Amazon. The report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.