Here’s Why Amazon Might Be Opening “Convenience Stores”

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Recently, the Wall Street Journal reported that Amazon (NASDAQ:AMZN) is planning to introduce convenience stores and curb side pick-up locations for its grocery business. The company is looking to build physical stores which will stock perishable items such as milk and meat.  Additionally, customers will be able to use their smartphones or in-store flat screen displays to order other non-perishable items in the store to be delivered on the same day. Providing an option to consumers to pick their fresh grocery items conveniently appears to be the key driver behind this initiative. Amazon is competing with Walmart in this space which is already innovating to make grocery shopping more convenient.  Walmart is reportedly developing self-driving carts which can help customers pick up items from stores, saving the hassle of walking around crowded long alleys.

Groceries account for nearly 20% of consumer spending in the U.S. We believe that, through this initiative, Amazon is looking to capture its due share in this market. Online grocery purchases at present are not very significant as a majority of consumers prefer to shop for fresh groceries on the way home from work. We believe that, in order to penetrate into the grocery segment, convenience stores will be the right strategy for Amazon, as it gives users an option to “touch and feel” the product before a purchase. However, competition in this space is intense and Amazon’s execution will be critical for this segment to drive profitability for the company.

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Grocery Business Can Fuel Growth In The Domestic Market

According to the Food Marketing Institute, the average U.S. consumer spends nearly $107 per week on grocery shopping which is around $5,500 per year, higher than the annual spend of an average Amazon Prime customer. While this indicates the huge potential of this segment, competition in the grocery space is high and consumers prefer convenient options where they can choose the fresh products they wish to purchase. Players such as Wal-Mart and Target are focusing heavily on their grocery sections since grocery shoppers drive store traffic. Target is stocking more organic products and working on a dedicated work force for its grocery section. Wal-Mart is working on consumer convenience by providing an option to get groceries delivered to the vehicle at the time of pick up. Through convenience stores it appears that Amazon is looking to grab a higher market share in this segment from its currently insignificant 1% figure.

Physical Stores Essential For Grocery Business

Online purchase of groceries is a convenient option that is expected to grow in coming years.  Amazon, with its strong delivery network, could prove to be better than the competition in terms of delivery times. However, a majority of consumers prefer not to purchase their fresh groceries online, since they like to pick the produce themselves. An option of a convenience store where consumers can pick up fresh items and order items with longer shelf lives through a smartphone app can work best for Amazon to expand its grocery business. This strategy can also enable the company to sell more profitable items (such as packaged food) as consumers frequent the stores for daily requirements.

Fresh products appear to be the next battlefield between Wal-Mart and Amazon, with both players innovating on the convenience front to gain market share. We believe Amazon’s convenience stores can draw traffic.  However, with intense competition in this space from established players, its success in the grocery segment will depend on strong execution and quality of produce.

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