Watch out Wesfarmers and Woolworths, Amazon is coming!

While it might be a little way off before Australians can order their groceries through Amazon’s (NASDAQ: AMZN) online store, residents in trial zones in the USA now can. As reported here, Amazon has been trialling ways to create a workable solution to grocery delivery for years within its home city of Seattle. It appears this hard work is beginning to pay off and is now working well enough that it recently began a limited trial in Los Angeles.

Feedback so far is positive; however the big problem for Amazon is that while conducting a successful trial within a designated area may be successful, expanding that trial to a whole city or indeed nationally, with on-time deliveries, is significantly harder. The logistics of providing a same-day delivery of perishable goods is described as “uniquely challenging”.

As part of Amazon’s assault on the grocery market, the company has launched Prime Fresh. The original Prime has been available for some time — for an annual subscription of $79 customers get unlimited two-day shipping for 12 months. Prime Fresh costs $299 per annum and offers customers unlimited same-day delivery of items and is targeted for grocery deliveries.

Online grocery sales in the UK appear to be gaining momentum as well. In a recent speech titled “Tomorrow’s Retail World”, the Chief Marketing officer of UK supermarket giant Tesco (LON: TSCO), Mr Matt Atkinson, outlined how technology was allowing Tesco to create innovative new ways of reaching its customers. Specifically Mr Atkinson pointed out that Tesco already had a market-leading, profitable online grocery business which includes a drive-through collection option at over 150 stores throughout the UK as well as a home delivery option. Interestingly, one change Tesco is positioning for is a move to smaller stores, as its largest stores become redundant due to the growth in online sales.

Given Australia’s significant population density along the eastern seaboard, coupled with its aging population the potential for growth in the home delivery of groceries appears significant. Wesfarmers (ASX: WES), owner of Coles, and Woolworths (ASX: WOW) both already offer online supermarket shopping with options for either “click & collect” or “home delivery”. Metcash (ASX: MTS), with its expansive warehousing and freight logistics expertise, also has the necessary logistics base to become a candidate for entering the online home delivery space in the future.

Foolish takeaway

It’s no wonder Coles and Woolies are already offering home delivery to stave off competition from potentially disruptive players like Amazon. Their first-mover advantage into online will no doubt be critical. The future grocery market that Tesco describes, should act as a beacon to investors that they need to monitor structural changes within the industry and keep an eye on how management teams respond to these challenges.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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