Amazon (NASDAQ:AMZN) is the king of e-commerce, but the company is increasingly looking to grow through its brick-and-mortar holdings.

In recent years, it's opened a number of Amazon Books stores and Amazon 4-star stores, small-footprint locations that showcase Amazon gadgets as well as books and well-reviewed items, and its 2017 acquisition of Whole Foods made it a sizable player in physical retail. Now the company is taking its latest step into the brick-and-mortar world with its first Amazon Fresh supermarket, which opened in the Woodland Hills section of Los Angeles at the end of August. 

The store will have some similarities to Whole Foods, including the availability of 365 by Whole Foods Organics, but will offer name-brand products like Coca-Cola and Kraft Mac and Cheese that are unavailable at the organic supermarket chain, as well as seemingly lower prices than Whole Foods. Amazon also promises that Fresh will offer same-day delivery -- free for Prime members -- and pickup, as well as a smart cart it calls Dash Cart that automatically scans and charges customers for what's inside when they leave the store.

A display of produce at an Amazon Fresh store

Image source: Amazon.

The opening was not a surprise, as reports have indicated Amazon's plans to open a non-Whole Foods grocery store in Los Angeles. Along with several other moves, it shows the company's ambitions in selling groceries, especially with a hybrid model, continues to expand. Whole Foods has brought order pickup capabilities to nearly all of its stores, tripling capacity from March. Amazon is also planning to lease space from an existing Kohl's (NYSE:KSS) for a second Fresh supermarket in Southern California, which could lead to more stores inside Kohl's, and the company is opening its second Go grocery store, a larger version of its cashierless Go convenience stores. Finally, it just opened a "dark" Whole Foods store in Brooklyn that is tasked only with fulfilling orders. Customers cannot shop there.

A collision course

Amazon has a number of advantages over Walmart (NYSE:WMT), including its third-party marketplace, Prime membership base, and wide selection, but the e-commerce giant trails Walmart by a wide margin in groceries. Groceries are a key category in retail -- they drive frequent purchases and loyalty and include essential items, as the pandemic has reminded us. They're also the source of about $200 billion in annual sales at Walmart U.S., which does not include Sam's Club.

Amazon launched Fresh online in 2007, and its Whole Foods acquisition a decade later signaled its seriousness about the $800 billion industry, but the company's lack of a store base puts it at a significant disadvantage in the grocery battle against Walmart, which has more than 4,000 stores across the country and claims to have a location within 10 miles of 90% of the U.S. population. That allows Walmart to offer pickup and delivery from thousands of stores, giving it a scale that Amazon can't match. 

More than any other retail category, grocery is also localized, as perishable products are expensive to ship long distances -- so being close to the customer is crucial. Notably, as Amazon seeks to build up its brick-and-mortar grocery options, Walmart is mimicking Amazon with the launch of Walmart+, its Prime-like service that offers free same-day delivery of groceries and other in-store products for a $98-a-year subscription. As both Walmart and Amazon seek to grow and capture new customers, they are becoming more and more similar: Both are turning into hybrids of brick-and-mortar and e-commerce as they copy each other's best strategies.

Amazon's endgame

So far, the threat Amazon was expected to pose when it acquired Whole Foods has not materialized. Supermarket stocks have mostly thrived since the deal, and Amazon's strategy in the sector still seems cryptic. As a high-end brand focused on organic products, Whole Foods' appeal isn't broad enough for the company to ramp up its expansion. It wouldn't make it in rural America.

But Amazon appears to be building the infrastructure to drive a larger grocery business with experiments such as the Just Walk Out technology behind the Go stores and the new Dash Carts, and it's tinkering with the best way to meet customers' needs in grocery, both inside and outside of Whole Foods. The new Fresh supermarket is its latest tactic for gathering knowledge, but in order to build significant scale in the industry the company needs physical real estate, and doing all of the site selection work and build-outs is time-consuming and expensive. That's why an acquisition (or several of them focused on local chains) looks like the company's best move here.

Amazon is still working out the best way to tackle the grocery opportunity, but when it's done experimenting the company will likely accelerate its expansion in the arena, through more Fresh stores or potentially new concepts. As CEO Jeff Bezos has reminded investors, as the company gets bigger, the scale of its experiments and failures needs to grow as well.

For a company of Amazon's size, opening one or two stores isn't enough to move the needle. This experiment still has a long way to go.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.