Taking the offline grocery shopping experience to the next level, Amazon (NASDAQ:AMZN) recently introduced “Amazon Go,” a retail store format which allows shoppers to pick the items they want and leave without any checkout procedure. The “just walk out” technology being used for these stores is based on the same technology used in self-driving cars. This format will provide some of the convenience of e-commerce to consumers who prefer to pick out grocery items personally, which would give Amazon a substantial competitive edge over other players such as Wal-Mart and Target. Amazon’s market share in the grocery segment is only around 1% currently, while groceries account for nearly 20% of consumer spending in the U.S. According to the Food Marketing Institute, the average U.S. consumer spends nearly $107 per week on grocery shopping, or around $5,500 per year, higher than the annual spend of an average Amazon Prime customer. The company has opened the first Amazon Go store in beta to employees, and will open it to the public in 2017. If Amazon is able to expand this format quickly, groceries can be a huge growth driver for the company in the long term.
Scale of Expansion Key For Growth
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While convenience is the key driver for purchase of groceries online, most consumers prefer to purchase groceries at a store since they like to pick the produce themselves. Morgan Stanley’s research shows that 67% of consumers who have never shopped for groceries online have not done so because they want to select produce themselves. Amazon Go appears to be Amazon’s master stroke in resolving this concern. As checkout lines dissuade some consumers from visiting brick and mortar stores, while the inability to pick fresh produce prevents them from buying groceries online, Amazon Go addresses both these issues. Consumers can open the Amazon Go app, pick up the items they want, and just leave the store. Their Amazon account will be charged later for the purchases, and they don’t need to check out. While this concept should attract consumers, Amazon’s ability to scale these stores will be a key factor in driving grocery sales growth for the company. Amazon is likely to open 2,000 grocery stores in the next decade, which is just a third of the nearly 5,500 stores Wal-Mart operates in the U.S. While this degree of expansion may not disrupt the grocery market to a great extent, it can ensure that Amazon grabs a significant share of the market. The grocery segment is a $600 billion market in the U.S., and a 10% share in this market would be nearly half of Amazon’s $137 billion in total revenues in 2016.
We believe the grocery space can be the next growth driver for Amazon, and with Amazon Go the company has indicated that it is ready to take on established players in this segment. While Wal-Mart is experimenting with self-driving carts and personal scanners for consumers to offer similar conveniences, Amazon’s ability to scale up Amazon Go stores will be the key factor to watch.
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