Amazon.com (NASDAQ:AMZN) can't seem to stay out of the news this week. In its latest push for world domination, the e-tailer is expanding its fresh grocery business outside of its hometown Seattle. AmazonFresh, as it's called, will soon offer same-day or next-day delivery of groceries in Los Angeles and the San Francisco Bay area, according to Reuters. However, will the low-margin business of food actually hurt Amazon stock in the long run?
Playing it smart
Amazon seems to be spreading itself thin these days. From its digital streaming service and endless e-commerce sites to its cloud-computing business, the world's largest online retailer covers a lot of ground. Now the company is adding fresh produce and meat to its offerings. Yet if Amazon hopes to make real profits in this category it will need to sell more than mere groceries.
This is a lesson that other retailers including Wal-Mart and Target know well. Target expanded into groceries behind Wal-Mart, as a way to position its store as a one-stop shop. This works for Target because the thinner margins of fresh produce are often offset by other purchases customers make when they're in a Target store.
Amazon could be taking a similar approach with its new fresh-produce offering. That's because AmazonFresh customers can simultaneously purchase other higher-margin products to be delivered along with their grocery orders. Not to mention, new AmazonFresh warehouses are said to feature refrigerated areas for keeping food cold, as well as traditional storage areas for other products, according to Reuters.
Why it could be a huge win for Amazon stock
This could be another growth catalyst for Amazon and its stock if the service takes off in these new markets. In fact, Amazon already plans to develop AmazonFresh in 20 more markets next year. Moreover, Amazon's thriving logistics business and distribution infrastructure should help the company succeed where others have failed.
Amazon stock could benefit down the road if the e-tailer were to expand AmazonFresh on a national level. One of the ways it could do this would be to acquire a smaller grocery delivery service, such as FreshDirect or Peapod. In the end, Amazon is doing what it does best: investing in its future.
Fool contributor Tamara Rutter owns shares of Amazon.com and Target. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.