Should grocery companies be worried about Amazon fresh?

The e-commerce giant is expanding its latest experiment in brick-and-mortar retail.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

Bloomberg is reporting that Amazon (NASDAQ: AMZN), the king of e-commerce, is getting more aggressive with its physical retail investments. Sources told the news outlet the company plans to open 28 new Amazon Fresh stores across the U.S. this year, adding to its 11 current locations. Amazon Fresh is a supermarket concept that, according to the company, offers high-quality food at low prices with an integrated offline and online experience.

Should investors in grocery companies like Kroger (NYSE: KR), Walmart (NYSE: WMT), and Sprouts Farmers Market (NASDAQ: SFM) be worried about Amazon's new brick-and-mortar venture? Let's take a look.

The Amazon Fresh concept

To elaborate, this is a new grocery store concept that is trying to create a seamless offline and online experience by bringing Amazon's e-commerce expertise to physical locations. The stores offer free same-day grocery delivery for Amazon Prime members, integration with Alexa to manage shopping lists, and for those who shop in person, the ability to skip checkout lines by using Amazon Dash Cart. All in all, it looks like a standard supermarket with some technology layered on top that could potentially improve the shopping experience for customers.

Amazon's currently open supermarkets are located in California and Illinois. If these and the planned new stores are successful, you can expect their numbers to grow significantly over the next few years.

Which companies could this hurt?

Whenever Amazon or any company with a lot of capital enters a new business or niche, it is important to look at what other businesses it could impact. With Amazon Fresh, this means others supermarkets. Every grocery chain, including Kroger, Sprouts Farmers Market, and Grocery Outlet (NASDAQ: GO), as well as general merchandise retailers such as Walmart and Target (NYSE: TGT), will be watching to see if Amazon Fresh gains traction with consumers.

The most vulnerable companies to Amazon Fresh would be cost- and health-focused supermarkets like Sprouts Farmers Market, Trader Joe's, and local food co-ops. These outlets target health-conscious consumers looking for something beyond the standard grocery experience, which is exactly the audience Amazon appears to be going after first with this supermarket concept.

Why investors shouldn't worry

Amazon entering the brick-and-mortar grocery business is not something to scoff at. However, investors should remember that grocery represents a gigantic market with an estimated 38,000 stores and $700 billion spent on groceries in the U.S. each year. So even if the company opens 1,000 Amazon Fresh locations over the next decade, that would leave plenty of market share for the incumbent grocers.

Lastly, Amazon has a history of poor performance when experimenting with physical retail concepts. Its acquisition of Whole Foods in 2017 didn't disrupt the market like many expected. In fact, many people would argue the Whole Foods experience has gotten worse since the chain was acquired by Amazon since it seems like stores are optimized for delivery and fulfillment -- to the detriment of the in-store experience. Its other test concepts like Amazon Go and Amazon 4-Star haven't gotten much traction (at least, not yet). That could change with Amazon Fresh, but if history is any guide, investors shouldn't rush to sell their grocery store stocks just because Amazon has designs on becoming a competitor. 

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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Brett Schafer owns shares of Sprouts Farmers Markets. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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