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Amazon's Expanding Its Brick-and-Mortar Presence

By Adam Levy - Oct 1, 2019 at 5:30PM

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A new grocery chain could complement Whole Foods and its online marketplace.

Amazon (AMZN -1.85%) appears to be moving ahead with its plans for a new grocery chain, according to a report from The Wall Street Journal. The online retail giant and owner of Whole Foods Market is leasing more than a dozen spaces in the Los Angeles area, focused mainly on densely populated suburban areas with middle-income households. The new stores will cater to a different demographic than Whole Foods and feature both prepared foods and mainstream groceries, with less of a focus on organic foods.

Amazon's exact plans for the new chain are still under wraps, but the first locations could open before the end of the year. The company is also looking at other major metropolitan areas, including Chicago, Philadelphia, and New York. Ultimately, the new chain could provide an excellent complement for the operations of Whole Foods Market, as well as Amazon's online marketplace.

A grocery produce display with a sign saying New lower price.

Whole Foods Market. Image source: Amazon.

Designing a store for today's grocery shopper

Today's grocery shopper is very different from just a few years ago, and Amazon is in a position to push existing trends even further.

Walmart (WMT 0.11%) introduced its online grocery format in 2013 and has invested heavily in that area over the last couple years. It's on pace to triple the number of pickup locations for online grocery orders from two years ago.

Amazon has taken steps to integrate online grocery ordering, with Whole Foods offering curbside pickup or free delivery for Prime members in certain markets. It hasn't caught on quite as much as Walmart's online grocery platform, but it has had a notable impact in shifting sales from its physical stores line item to its online sales. Amazon is taking further steps to integrate its online marketplace with Whole Foods and Prime Now to increase online grocery orders.

Amazon will likely build out its new chain with online ordering in mind. Combined with its focus on a slightly different demographic than Whole Foods, it should provide a boost to the company's online grocery platform.

But relying on an entirely different grocery chain to expand its online grocery sales will lead to complexity and increased costs. Amazon will have to manage that complexity either on the ordering side (limiting options) or the fulfillment side (increasing fulfillment expenses). Either way, the company will see an impact on its profits. Amazon may be able to offset that pressure by designing stores for more efficient order fulfillment.

Building the omnichannel

The biggest area where Amazon trails Walmart in online grocery ordering is in curbside pickup. While Walmart offers curbside pickup at around 3,000 stores in hundreds of metro areas, Amazon only offers pickup in 30 cities. Amazon actually offers delivery in 90 markets, due to the constraints of some Whole Foods store formats.

But there's strong demand for curbside pickup. The option gives customers more flexibility in their ordering, enabling them to pick up orders at their convenience, instead of waiting at home for delivery. It may be preferable, for example, to pick up groceries on the way home from work instead of having them delivered in some two-hour window.

Amazon's focus on more suburban locations with more parking lot space and the option to design stores from scratch could mean a greater focus on curbside pickup.

Giving customers more options for how their orders are fulfilled ought to provide a boost to sales. Amazon could eventually offer a strong alternative to Walmart's near-ubiquitous curbside pickup. Considering grocery sales have accounted for the bulk of Walmart's online sales growth over the last couple years, that could have a considerable impact on both Amazon and Walmart.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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