Amazon.com Owns The Online Grocery Business

Shoppers at a checkout-free Amazon Go grocery store in Seattle. Photo: Kyodo News via Getty Images

By Rich Duprey, The Motley Fool.

In the year since Amazon.com (NASDAQ:AMZN) acquired Whole Foods Market, the e-commerce giant has increased its dominance of online grocery sales, capturing 30 percent of the entire market. No individual company even comes close, though supermarkets combined have the same percentage as Amazon, followed by mass merchants at 13 percent.

A recent survey by Brick Meets Click indicates there are some cracks in the wall Amazon has built, though. Supermarkets may be able to close the gap between themselves and Amazon, as well as the last mile between customers and their orders.

Brick Meets Click found that shoppers spent just $45 per order on average at Amazon, while spending $116 on each order at supermarkets. Online grocers like FreshDirect and Peapod saw even higher levels of spending, some $146 per order on average. Customers also shopped the other outlets more often than they did Amazon, returning to the other sites twice per month, compared to 1.7 times for the e-commerce giant.

What's at stake for Amazon

Amazon.com is looking to be the first place consumers turn for all their needs, and groceries are a big component of that.

It has ambitious plans to grow its brick-and-mortar footprint, recently announcing it wants to open as many as 3,000 Amazon Go cashier-less convenience stores by the end of 2021. That's likely more of a concern to the convenience-store sector, as Amazon Go will focus on grab-and-go items rather than trying to be a place where customers do weekly or monthly grocery shopping. Nevertheless, Amazon has a powerful weapon in its Prime membership program, which ties together all its disparate pieces.

Prime Now, for example, began supporting online orders in most markets served by Whole Foods, and Amazon announced additional ways for Prime members to save while shopping at Whole Foods, either in-store or online. The company also offers the AmazonFresh program, Prime Pantry, and Prime Now, all of which were joined with Whole Foods' own home-delivery and store-pickup services, along with private-label sales through Amazon.com.

Whole Foods also gives Amazon the infrastructure -- such as its distribution centers -- to get closer to customers no matter where they shop.

Why Amazon needs to do more

For all of Amazon's impressive reach, Brick Meets Click found that although 77 percent of all households that are online shop at Amazon, only 11 percent buy groceries from the e-commerce leader.

There are several reasons why that gap exists. One is that supermarkets are everywhere. Whereas Whole Foods Market has some 400 or so stores across the country, Kroger has over 2,700 locations and Walmart more than 14,000. You're likely to find at least one supermarket in almost every town, which means it's not especially inconvenient to visit.

Supermarkets have also been innovating with services like "buy online, pick up in store," allowing them to leverage their massive physical footprints to better effect. They're also experimenting with crowdsourced delivery options like Uber and Lyft, as well as driverless cars, to make ordering online more convenient.

Arguably the biggest reason more people aren't shopping for groceries online, whether at Amazon or at supermarkets, is that consumers are reluctant to let others pick their perishable items like fruits and vegetables, or meat, fish, and chicken. Many are concerned that a random worker wouldn't be as selective as they would be themselves.

A $100 billion opportunity

The Food Marketing Institute estimates that online grocery sales will become one-fifth of the total grocery retail market by 2025, or about $100 billion in sales. Although Amazon is seen as the industry leader, others could still whittle away at its dominance, if not catch up to it.

Even so, Amazon investors should keep an eye on the biggest supermarkets: they could eventually challenge the growth of Whole Foods and Amazon Go, and how Prime relates to both.

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