Hey LA, Amazon.com, Inc. (AMZN) Wants to Be Your Grocer!

Amazon.com, Inc. (NASDAQ:AMZN) is on a mission to be your grocer. The online retailer recently expanded its online grocery delivery business into areas of Los Angeles after operating for six years in its hometown of Seattle. Industry analysts believe Amazon’s main objective in venturing into the grocery business is to profit from consumers buying other products along with their grocery order. Consumers who like the service may move an even greater portion of their purchases online, providing a clear benefit to Amazon, with its wide array of products.

For consumers in Los Angeles interested in placing an online grocery order, you need to be a member of Amazon.com, Inc. (NASDAQ:AMZN) Prime and, after a free trial period, pay an annual fee of $299. Kate Wendt, an analyst at Wells Fargo, told CNBC that the high fee on the service makes sense, as it would limit the order volume and allow Amazon to work on any issues affecting the order and delivery experience. As the service improves and expands into other areas, there are greater chances of customers signing on and sticking with the service over the long term.

Grocery chains should watch Amazon’s next move

Industry experts are skeptical that Amazon.com, Inc. (NASDAQ:AMZN) can persuade consumers to do their grocery shopping online. Opponents believe the storage and delivery issues that led to the failure of Webvan, a start up that ventured into online grocery shopping 12 years ago, are still there. Amazon will have to deal with delivering perishable goods that can go bad while in storage or get damaged during delivery.

In Los Angeles, Amazon.com, Inc. (NASDAQ:AMZN) also has a competitor — Yummy.com, which has been delivering groceries for the past 10 years. Yummy charges customers $3.99 and guarantees delivery within 30 minutes after placing an order. In comparison, Amazon will deliver your order within a designated time window on the following day. If Amazon’s new service succeeds, it could expand into other markets and affect grocery chains like The Kroger Co. (NYSE:KR), Safeway Inc. (NYSE:SWY), and Whole Foods Market, Inc. (NASDAQ:WFM).

Will online grocery shopping catch on in the U.S.?

For Amazon.com, Inc. (NASDAQ:AMZN) and grocery chains considering online grocery options, our UK neighbors can provide examples of what could work in the US. Online grocery shopping is very popular in the UK, especially in London. Grocery chain Tesco Corporation (USA) (NASDAQ:TESO) has provided an online shopping option for customers since 1997. Tesco’s service allows its customers to shop online and pick up their order at a local store, called “Click & Collect,” and some stores have a drive-through available. The company also has delivery centers that fulfill orders. As demand has increased, more centers are being opened to provide a better home-delivery service. Customers can also shop through multiple channels like their desktop or mobile device.

Tesco Corporation (USA) (NASDAQ:TESO)’s first-quarter management statement released on June 5 stated that online grocery sales outperformed the market and this segment is their fastest-growing channel. For the company’s fiscal year ended on February 23, 2013, online grocery shopping sales increased in the UK by 12.8%. The company sees online grocery as a segment of sizable growth and has added online grocery options to eight of its international markets.

Another British grocer succeeding in the online grocery business is J. Sainsbury. The company ranked second in online grocery sales and the business is growing at a rapid pace. The company’s first-quarter statement ended June 8 mentioned that growth in its online grocery business is over 16% year-on-year. Like Tesco Corporation (USA) (NASDAQ:TESO), Sainsbury’s customers also have a Click & Collect service or can choose home delivery, which the company can provide to over 96% of UK households. Sainsbury’s current online grocery orders typically exceed 190,000 per week, providing an additional 25,000 orders over last year. To add another channel to its customer experience, the company launched in May 2012 its online grocery mobile website, with 20,000 products available on the site.

My Foolish conclusion

I’m skeptical of whether online grocery shopping at Amazon.com, Inc. (NASDAQ:AMZN) will encourage customers to include other higher-margin, general merchandise items in their purchases. British grocers, who have been offering online grocery shopping for years, have recently noted sustained, rapid growth in their online grocery business, yet sales of general merchandise have lagged in comparison. This may be due to current economic conditions in Britain, which may be limiting spending on discretionary items.

If Amazon.com, Inc. (NASDAQ:AMZN)’s venture into online grocery shopping succeeds and the service expands to other areas of the US, this could trigger changes at food retailers to offer online grocery shopping or alter their current online services. Consumers are known for spending more online, so providing a variety of online grocery shopping options could boost sales at grocery chains over the long term.

The article Hey LA, Amazon Wants to Be Your Grocer! originally appeared on Fool.com.

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