Americans are buying more and more of their groceries and household necessities online. And thanks to its acquisition of Whole Foods Market, Amazon.com (NASDAQ:AMZN) is perfectly positioned to capitalize on this enormous trend.
The U.S. lags much of the world in online ordering of everyday household goods, also known as fast-moving consumer goods (FMCG):
FMCG includes groceries, household products, and even pet food. It's also the last holdout in a retail world increasingly dominated by e-commerce. Fortunately for Amazon, this dynamic is quickly changing:
Increased sales of FMGC goods stands to be a boon for Jeff Bezos and company. Amazon made online orders for books commonplace, and now, as consumers grow accustomed to ordering things like groceries from their computer, Amazon is the obvious go-to source.
Consumers win, but what should investors think?
Amazon's success depends on its ability to grow and disrupt any industry that Bezos believes it can compete in. As Bezos himself has said, "Your margin is my opportunity."
Amazon was notoriously unprofitable for years. But in spite of the red ink, believers saw a future in which Amazon achieved dominance in a market through fierce competition, after which profits would abound.
The bull argument had a big win when Amazon Web Services (AWS) burst onto the scene. AWS is now the dominant Web hosting service in the U.S. and an enormous cash cow, having generated $1.17 billion in operating income in Q3 2017 alone. This was on sales of $4.58 billion, yielding a 25.54% gross profit margin. Amazon's traditional e-commerce division, on the other hand, netting operating income of just $112 million in Q3 2017 on an enormous top-line of $25.45 billion. The grocery business is going to produce similar margins to the company's existing e-commerce operations, so don't expect a pot of gold to appear in Amazon's financials any time soon. There will be some additional revenue coming in, but Amazon's real opportunity with groceries is strengthening its suite of products and services.
The grocery business comes down to strategy
The company's strength in any market increases with the value of its ecosystem, and its profitability rises by offering customers more. By acquiring Whole Foods, Amazon did just that, instantly gaining over 450 physical retail locations in prime, valuable urban markets.
The physical stores it gained also allow Amazon to offer new services, further increasing its value proposition. It's already placing pick-up lockers and expanding its delivery capabilities at Whole Foods locations.
A retail presence feeds into Amazon offerings such as its Dash Buttons to instantly reorder common household items. Increased online ordering of FMCG items also lends itself to Amazon's recently announced Amazon Key service, which authorizes Amazon delivery personnel access to customers' homes.
Foolish bottom line
Currently, Americans buy far fewer everyday FMCG products online than other nations do. But that's changing, and thanks to its purchase of Whole Foods, Amazon is ideally positioned to take advantage of the trend. As Americans increasingly order things like groceries and household necessities online, Amazon will be there to ensure timely delivery of everyday essentials.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.