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Should Amazon Open 2,000 Grocery Stores?

By Motley Fool Staff – Nov 14, 2016 at 4:17AM

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The online retailer surprised investors when it said it was pursuing a physical grocery store model.

Amazon (AMZN 1.75%) has been slowly expanding from the online world into physical stores. Now, the company has said it might open up to 2,000 grocery stores across the United States over the next few years.

In this clip from Industry Focus: Consumer Goods, host Vincent Shen is joined by Motley Fool contributor Daniel Kline to talk about whether this idea benefits the company or shareholders. The two discuss the different formats the company is considering while also looking at how it's going to leverage its membership base to launch these stores.

A full transcript follows the video.

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Vincent Shen: This news came out a week or two ago, and as additional details for the plans for the company we're speaking about, which is Amazon. It's with their physical stores that they seem to be interested in launching. I think they surprised a lot of investors and industry followers last year when they started dabbling, last year, in their first physical retail locations. The thing is, the company often tests and experiments with these new ideas in its home city of Seattle. First it was bookstores. The company has now launched small pop-up stores, think mall kiosks, several hundred square feet of retail space. Not very big, but enough to feature things like its Kindles, its Amazon Echo speaker.

So, a lot of these locations, it appears, have resonated with consumers. The company might be expanding that, and those efforts, during the holiday shopping season. But I think the bigger potential impact for the company, for its revenue, for its top line and bottom line, seems to be with groceries. This potential test they're doing with 20 grocery stores in cities like Seattle, Las Vegas, New York, Miami, and San Francisco -- it's called Project Como. What do you think?

Dan Kline: It's peculiar to me. I understood the logic of launching stores where I sell you a Kindle or an Echo, because when you buy a Kindle, or Fire TV, or whatever it is, I then have a pathway into your living room. So, I can run that store at a loss, but I'm making money off of you buying content for the rest of time, or at least for a few years, until you have to throw the device away. Going into the small grocery store -- and these are going to be interesting models where you can order online and pick up, and maybe select some produce, and pick your fish, but not have to pick your cereal -- it's all, frankly, models that consumers have rejected, in terms of 10,000 different grocery delivery start-ups that have gone out of business.

I get it -- the goal is to build the distribution network, to make it more logical for Amazon to have a warehouse in your neighborhood. They're not just delivering to your house, they're also supplying this warehouse. They can move produce faster. But these are commodity items. It's not like Amazon can price broccoli dramatically better than Kroger can [laughs]. So, I don't see why I would go to it. Prime and getting deliveries to my house -- that makes sense to me. Having to show up to Amazon to get Lucky Charms, when they sell Lucky Charms at the Publix near my house -- it doesn't make sense.

Shen: I will counter that, to an extent, just to give some additional detail on what Amazon is looking at. The company is going to be testing a ton of different store formats. Some of the details that we do have: Some locations might be around 30,000 square feet, which is just a little smaller than you would see in your typical supermarket.

Kline: It's like a Whole Foods.

Shen: Exactly. Those would be the larger establishments. Then, they would have small convenience-store setups, and some of these pickup-focused locations that would be 10,000 square feet. Another caveat for access and the market size for this opportunity is, The Wall Street Journal is reporting that for initial testing of these locations, they will actually be exclusive, potentially, to current AmazonFresh members. So, recently, it seems like the company has seen a little bit more success in terms of profitability with that. They've lowered the price from $300 a year to about $15 a month. That has been encouraging for the company. What do you think about the potential exclusivity?

Kline: It becomes a bit of a Costco model. We've talked about this a hundred times -- Costco makes roughly 75% of its revenue from membership fees, so it encourages you, whether it's Prime, or Fresh, or whatever Amazon calls the membership, it gives you more incentive to join, which has been a driver for sales. I see the logic of that. But 2,000 stores built around groceries? 

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends, Costco Wholesale, and Whole Foods Market. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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