Amazon Go Is Ready for Prime Time

The e-commerce giant could open as many as 3,000 of its new cashier-less stores by 2021. Here's what that could mean for investors.

Jeremy Bowman
Jeremy Bowman
Sep 22, 2018 at 10:50AM
Consumer Goods

So far, Amazon (NASDAQ:AMZN) Go -- the e-commerce giant's cashier-less convenience store concept -- hasn't been going very fast. But that's about to change.

Amazon introduced the concept in December 2016, opening a single store in Seattle that at the time was only open to Amazon employees. Amazon said the new store would open to the general public in the first quarter of 2017; however, kinks with the technology delayed the grand opening until January of this year. 

Since then, the company has opened three more stores -- two more in Seattle and one in Chicago. Alarm bells in the convenience-store industry and elsewhere recently sounded on a report that the company could open as many as 3,000 of the automated stores, which have no cashiers and no lines, by 2021.

A view of the inside of an Amazon Go store

Image source: Amazon.

Shock and awe

Bloomberg reported Wednesday that Amazon plans to have 10 Go stores open by the end of this year, 50 by the end of 2019, and as many as 3,000 by 2021. Such a fast expansion could reorient the convenience-store and fast-food industries, especially as Amazon's "Just Walk Out" technology, built on a network of cameras that automatically charges customers based on what they take off the shelves, is unique in the market.

Amazon is currently experimenting with models for its Go stores. Two of them offer only prepared foods like salads, sandwiches, and snacks, while the other two stores also have a small selection of groceries, making them more similar to a 7-Eleven or a typical convenience store.

Shares of supermarket and discount chains including WalmartKroger, and Target all fell when the news broke, a milder replay of the crash that took place in supermarket stocks after Amazon announced it would acquire Whole Foods. While it's unclear if such Go stores would be more of a threat to supermarkets than convenience stores or fast-food restaurants, it does give Amazon yet another way of utilizing Whole Foods. Amazon can use Whole Foods' products and ingredients in the Go stores, or it can add "Just Walk Out" technology to existing Whole Foods stores, effectively opening Go stores within them for customers who want to get in and out quickly with just a few items. 

Will it move the needle?

An aggressive expansion to 3,000 stores would certainly be a bold move for Amazon. However, it raises the question of whether even that number of Go stores would have a significant effect on the company's bottom line.

The U.S. currently has 155,000 convenience stores, according to industry group NACS, but most of those, or 122,500, are combined with gas stations, a business Amazon has yet to show an interest in. Non-fuel purchases at convenience stores in 2016 totaled $233 billion, but the best-selling product is cigarettes and tobacco, which Amazon has no plans to sell. If Amazon opened 3,000 stores that each delivered sales similar to the average convenience store, the company would grab about 2% of the convenience-store market, or about $5 billion. For a company that generated more than $200 billion of revenue over its last four quarters and whose revenue is growing by more than 30% annually, an incremental $5 billion would be negligible.

By comparison, Casey's General Stores is one of the largest publicly-traded convenience store companies on the market, with 2,073 stores as of April 30. It generated about $8.4 billion in sales in the fiscal year ended April 30, but only $3.2 billion in non-fuel sales. Operating income, the bulk of which comes from non-fuel segments like prepared foods and grocery, was $265 million, or an average of $128,000 per store. If Amazon's stores generated similar operating profits, 3,000 of them would deliver $384 million in operating profit, or about 5% of its operating income over the last four quarters of $7.4 billion.

However, a convenience store chain may not be the best proxy for the Go stores. Since Amazon appears to be leaning toward prepared foods, the Go stores may more closely resemble a fast-food chain like Chipotle Mexican Grill. Chipotle's restaurants generate about $2 million in revenue on average, which would translate into $6 billion for 3,000 Amazon Go stores. The burrito chain made $312 million in operating income in its last four quarters, or a similar level of profit per store as Casey's.

The highest-grossing fast-food chains are Chick-Fil-A and Shake Shack, which each make about $4 million in revenue per restaurant. If Amazon Go were to match the efficiency of the best-performing fast-food restaurants, 3,000 of them could generate $12 billion in sales and perhaps as much as $1 billion in operating income. While that would be a meaningful contribution to the company's financial results, especially on the bottom line, the real potential of the Go store and Just Walk Out technology could be in its optionality, or ability to create unforeseen benefits, and network effects.

Amazon has reached a $1 trillion valuation largely because of its impressive network of competitive advantages, including its Prime loyalty program, its third-party-seller marketplace, and a fast-growing advertising segment. The Go stores give the company another opportunity to strengthen the Prime program, as it could offer discounts to Prime members as it already does in Whole Foods stores, or license the technology to other retailers. Amazon Go could represent a whole new business vertical, much as Amazon's voice-activated Alexa technology does. It also supports the company's mission to delight customers, as waiting in line is one of the biggest shopping annoyances.

It's not clear yet what will become of Amazon Go, but Amazon looks ready to disrupt another corner of the American retail industry.