Amazon is rewriting the playbook for grocery delivery. The company’s new push to add fresh groceries to its same-day delivery service in select markets, where Prime members can already buy non-perishables and all kinds of other items, is no experiment. It’s a calculated bet on logistics that enables customers to order eggs and baked goods at the same time as T-shirts and picture frames and get everything delivered together. By further enhancing its same-day fulfillment hubs, the e-commerce and cloud giant is aiming to narrow the gap with traditional grocers while setting a new standard for convenience. “Our north star here is we want to continue to make grocery shopping easier, faster, and more affordable for our customers,” said Jason Buechel, CEO of Amazon-owned Whole Foods Market. “Now, under one roof, you have the opportunity for customers to get all the things they’ve always been purchasing from our same-day facilities and adding perishable groceries to that as well,” Buechel told CNBC in an interview. He is also vice president of the company’s worldwide grocery stores, which also include the Amazon Fresh and Amazon Go brands. What’s at stake Amazon announced on Aug. 13 that Prime members in more than 1,000 cities and towns can now get free delivery on perishable groceries and any other items available for same-day delivery. Orders under the $25 minimum would incur a $2.99 fee. Amazon plans to expand to 2,300 markets by year-end, with further expansion slated for 2026. If available in your area, the new options will be served automatically to Prime members who are logged into Amazon’s website. This enhanced service is different from the fresh food and grocery items already available from Whole Foods Market and other partners. The existing service fills orders at local stores that are then picked up and delivered by local drivers. That model is not going away. But some of that ordering, particularly smaller orders, could shift the new paradigm of fresh foods warehoused at same-day delivery fulfillment centers According to Buechel, Amazon’s ability to roll out the new service at scale comes from expanding and retrofitting its existing same-day facilities or smaller, specialized sites designed to pick, pack, and sort in-demand items for rapid delivery to customers within a short driving radius. “What we’ve done is extend upon our already existing infrastructure … adding in some specialized capabilities that will allow us to support perishable groceries,” Buechel said. Those capabilities include creating a temperature-controlled environment to support product freshness of perishable groceries. Buechel also highlighted “specialized training programs for our employees that are helping them support the cold-chain processes required in a perishable environment.” On the day of the announcement, Amazon stock rose more than 1% while delivery competitors like Instacart and DoorDash dropped 12.4% and 4.8%, respectively. Walmart , which has a major grocery presence, and pure-play grocer Kroger also slipped 2.3% and 4.2% that day. The market’s initial reaction signaled Amazon’s latest move could pose a competitive threat. However, early analysis from Wells Fargo and others suggests Amazon’s “share capture could be slow,” pointing to “points of friction,” such as a limited assortment of fresh options, wide delivery windows that frustrate customers, and the need for continued investment to build out the service. Still, Buechel pointed to encouraging early adoption. He noted that 70% of customers who used the new service at its initial launches in Phoenix, Orlando, and Kansas City, Missouri, were first-time perishable buyers, and more than 20% returned within the first month to make additional purchases. “It really showed us the unmet demand that we had with our customer base and that we as Amazon are a trusted partner for our customers in being able to deliver this offering,” he said. Years in the making Amazon has been building toward this grocery expansion for years. Amazon Fresh debuted in 2007 in Washington state, promising delivery within a two-hour window. Over time, that offering has scaled to meet growing customer demand. Amazon Fresh launched brick-and-mortar locations starting in 2020, and currently has more than 60 stores, according to the company . In 2017, the company deepened its grocery footprint with the acquisition of Whole Foods Market, bringing a trusted brick-and-mortar brand under its umbrella. Whole Foods stores currently are up to more than 535. When customers shop Amazon Fresh on Amazon’s website, those orders are filled separately from the same-day delivery infrastructure, using grocery fulfillment centers or an Amazon Fresh store or a Whole Foods, depending on which is closer. Today, tens of millions of shoppers turn to Amazon Fresh and Whole Foods for their full range of grocery needs while also using Amazon’s platform to shop local and specialty retailers. Amazon has become one of the largest grocers in the U.S., generating $100 billion in annual gross sales from groceries and household essentials. While those early moves laid the foundation for Amazon’s grocery ambitions, it’s the company’s network of same-day fulfillment centers that have become the real engine of its rapid delivery strategy. These same-day fulfillment centers have “really made a difference” in Amazon’s push to expand grocery delivery, said Marc Wulfraat, founder and president of MWPVL International, a specialized supply chain, logistics, and distribution consulting firm. Wulfraat estimates that roughly 76 same-day fulfillment centers have been retrofitted with coolers and freezers to enable the fresh groceries to be stored in the same locations as all the other same-day items. Wall Street analysis In its announcement, Amazon said it expanded its same-day delivery service to include “thousands of fresh grocery items.” While thousands may sound like a lot, Wells Fargo said, “Prime same-day grocery selection looks somewhat limited.” The analysts added, “While Amazon is likely to expand its offering over time, it may initially struggle to become a regular grocery option for consumers without a broader basket.” Wells Fargo estimates grocery could be a drag on Amazon’s operating income with each percentage point of U.S. market share potentially costing $2.5 billion to $3 billion annually due to thin margins. While crediting Amazon’s logistics strength and Prime as competitive moats, the analysts said that grocery’s “margin profile” and “operational complexity” warrant investor caution. Wells Fargo has an equal weight rating on Amazon and a price target of $245 per share on the stock. MoffettNathanson takes a similarly cautious view. They said the number of SKUs, or stock keeping units, “falls well short of what the consumer ultimately needs, tens of thousands of items.” The analysts’ grocery industry research shows that the average grocery store carries 32,000 items, underscoring “Amazon’s difficulty in strong-arming their way in” the grocery market. The analysts stress that “selection needs to increase by orders of magnitude. Otherwise, this remains a limited top-off use case.” MoffettNathanson has a buy rating on Amazon and a price target of $263. For its part, Amazon notes that the 32,000 products at a typical grocery stores includes far more than just perishables, and that its same-day delivery service includes millions of items. That includes things like hand soap, bandages and paper towels — all commonly purchased on trips to the grocery store. Nevertheless, Amazon seems to recognize its initial same-day limitations, saying the new service is designed to “complement Amazon’s existing grocery delivery offerings — including Amazon Fresh, Whole Foods Market, and a variety of local grocery and specialty retailers on Amazon.com.” Bottom line We see the grocery expansion as a bold step given the industry’s complexity and razor-thin margins, but meaningful disruption across the sector will take time to unfold. If any company can make such a power move, it is well-funded Amazon, which also boasts financially strong businesses in advertising and the cloud. For now, we view this as a long-term story with Amazon gradually pressuring traditional grocers as it refines its offerings and expands selection. We also have confidence in Amazon’s decades of logistics and Whole Foods’ expertise to give customers a one-stop shop, same-day solution for all their essential needs. We continue to maintain our buy-equivalent 1 rating on Amazon shares and a $250 price target. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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