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3 Reasons Amazon's Surging Demand Will Stick Around Long-Term

By Adam Levy - Apr 16, 2020 at 11:00AM

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Amazon is seeing sales spike amid the coronavirus pandemic.

Amazon (AMZN 0.14%) has given several signals that it's seeing increased demand on its online marketplace amid efforts to social distance and slow the spread of the novel coronavirus. Several moves point to serious capacity constraints in its warehouses and logistics network.

But there's reason to believe Amazon will be able to retain a lot of its new customers long-term. Here are three factors that should keep shoppers coming back to Amazon even after things start returning to normal.

A 3D rendering of the Amazon smile logo.

Image source: Amazon.

Coronavirus is putting lots of pressure on physical retailers

Hundreds of thousands of store locations have been forced to close their doors amid stay-at-home orders. Retail sales for March fell 8.7%, and physical retailers focused on discretionary purchases were hit hardest.

That puts pressure on the cash flow of physical retailers. They're still expected to pay rent and other expenses while producing substantially less revenue. As a result, we could see a lot of store closures over the next few months as retailers decide to cut their losses and pare down their operations.

Gap (GPS -1.72%) was already closing stores for its Gap brand, but the coronavirus pandemic will lead it to be more aggressive. "This crisis will absolutely set a new baseline for what component of the fleet we want to keep and we expect to remain aggressive in pruning the fleet," CFO Katrina O'Connell said in a conference call last week. Countless other retailers will likely follow suit, and it could be even worse for small businesses with just one or two stores and limited online presence.

A lot of growth is coming from online grocery

Amazon has rapidly expanded its online grocery efforts as a response to increased demand from consumers trying to stay home as much as possible. It went from providing grocery pickup from 80 Whole Foods locations in early March to 150 stores by early April.

14% of all new online grocery shoppers in March chose Amazon, which made it the second most popular option after Walmart (WMT -0.32%). But where Walmart is mostly defending a market it dominates with online grocery, Amazon has a lot to gain. Even if shoppers move some of their grocery purchases back to physical stores when things start to return to normal, it's likely the behavior change caused by the pandemic will accelerate the growth of online grocery.

Online grocery platforms were already seeing booming sales in 2019 and early 2020. Amazon stands to gain overall market share of the industry as more grocery spending moves online.

Growing Prime members

Finally, there's a strong likelihood Amazon has seen an increase in signups for its Prime membership program. (Note, Amazon hasn't mentioned how Prime membership has been affected by the current environment.)

There are a few reasons for this. 

First, Amazon requires a Prime membership for its grocery delivery and pickup programs. While it may be that Amazon is only winning new grocery orders from existing Prime members, it's likely that the program has brought in quite a few new subscribers. 

Second, the main benefit of Amazon Prime is faster shipping -- usually one-day shipping. With customers needing items as fast as possible these days, Amazon Prime shipping can be more valuable than ever. That said, existing Prime members may be upset that Amazon has prioritized certain items over others, causing shipping delays on certain orders.

Finally, Amazon Prime also includes the Prime Video service. With streaming hours booming with more time spent at home, Prime Video offers good value to consumers.

Amazon has a good track record of retaining Prime members long-term, and Prime members consistently spend more on Amazon's marketplace than non-members. As a result, pulling forward Prime membership growth ought to lead to greater long-term sales. Unfortunately, that factor could be mitigated by the need to delay Prime Day this summer.

Increased Prime memberships, booming online grocery sales, and a bleak outlook for physical retailers will support sales acceleration for Amazon well after things start going back to the way they were in January and February.

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 and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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