An old idea in the 21st century
While a blockbuster rollout for Amazon Fresh is troubling for Safeway and Whole Foods there is a problem for Amazon if they don’t get enough cross-shopping as the grocery business is a prosciutto-thin margin proposition. Safeway’s profit margin is 1.48% and Whole Foods’ is 4.13%.
Delivering groceries has always been a loss leader. For decades home delivery was considered a perk for patronizing a neighborhood mom-and-pop grocery but then the supermarket chains came in and killed home delivery.
Home delivery has been a difficult business, as NPR recalled the dot.com bust of Webvan. Royal Ahold has been working on perfecting Peapod, its grocery delivery service since 1989. Some of the yelp! reviewers fondly recalled HomeGrocer, a similar concept, which fell to the curb.
What goes around, comes around as consumers want home delivery back. The demand for the service is certainly there but profitability has always been the sticking point. Amazon has long been willing to sacrifice margins to the greater good of getting people to buy media, witness the Kindle e-reader and tablet devices. Amazon already has a negative profit margin of -0.14%.
As a consumer I am eagerly anticipating AmazonFresh delivery but an Amazon shareholder should wonder how long the rollout will take before cross-shopping profits will show up, if ever. In other words, don’t buy Amazon on this grocery initiative alone. If you want a grocery stock Safeway has a 3.50% yield and a trailing P/E of 8.44. Of course, the shorts are betting big against Safeway at 23%. The supermarkets won once on price and could do it again.
Whole Foods will feel the brunt of online delivery more than Safeway, but even if Amazon is accelerating the pace of the rollout Whole Foods earnings shouldn’t be affected for several years. People who can afford it still love to shop at Whole Foods for the experience. It trades at a 36 trailing P/E and offers a .80% yield.
Why buy Amazon at all?
Buying Amazon has always involved a certain leap of faith with a forward P/E in the ’80s. Nonetheless, investors have been rewarded trusting CEO Jeff Bezos and his magic beans.
Buy Amazon for its role as the e-commerce leading retailer, for its cloud component or even for its foray into creating original entertainment content. Buy it for its Prime membership and all its varied specialty shopping sites but don’t buy it thinking AmazonFresh is the newest bag of beans. These beans will be slow to take root. By mid-2014 investors should have a much better idea how AmazonFresh is a growth driver.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Whole Foods Market. The Motley Fool owns shares of Amazon.com and Whole Foods Market.
The article Amazon’s Fresh Take on an Old Idea originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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