There’s money in the grocery business. $565 billion worth of it every year, according to a report from CNBC. Problem is, profit margins have always been historically low in this sector.
So why would a couple of retailing giants like Amazon and Wal-Mart rush headlong to get into the food business? Does either company believe that sending in their strike forces to establish a beachhead on Aisle 2 will be worth the cleanup effort? Not to mention the cost?
Rumblings from both behemoths would seem to indicate that the grocery business is about to see some stepped up competition. Despite inherent obstacles to success – like a huge and segmented market that challenges even heavyweights like Kroger and Safeway – Amazon looks to expand rapidly over the next year or so. And Wal-Mart? Is, well, Wal-Mart, which means one of its super-box stores could drop out of the sky and gain market share almost immediately.
“Item not available in downloadable format”
When we say that Amazon looks to expand rapidly, we do mean online – with a twist:
- The company’s Amazon Fresh service – where customers order on the Web and the company physically delivers the goods to their doors — has been operating in the corporation’s hometown of Seattle for the last six or so years.
- CNBC says that the online retailer quietly rolled out a second delivery area in Los Angeles recently and might add another in the San Francisco vicinity later this year.
- From there, 40 – count ‘em, 40 – more areas look to become part of the service during 2014.
Does Amazon have the wherewithal to pull off that kind of expansion that quickly?
“They’ve had the benefit of working on this for six years in Seattle,” Wells Fargo’s Kate Wendt told CNBC. “They have figured out how to source perishables. It’s the only business they have where they actually operate their own fleet of trucks.” Other analysts quoted in the story seem to underscore those points, noting that Amazon has for decades demonstrated that it can deliver the goods. As long as that continues – with quality, fresh products taking their places alongside downloadable ones – customers might be willing to jump on the Amazon bandwagon that much sooner.
Lower prices, lower prices, lower prices
But Wal-Mart? In the grocery business? Not such a crazy idea, says a consultant interviewed by CNBC, especially when considering that Wal-Mart tends to win most price wars – sometimes prices can be 20% or more lower than the competition, as some of the retailer’s TV commercials say.
Another impressive factoid: Wal-Mart already sells more groceries than any other supermarket chain in America. Its $151 billion in grocery sales in 2012 accounted for more than half of its U.S. sales – and the dollar figure was a mere $7 billion less than the sales of Safeway, Supervalu and Kroger. Combined. And while Wal-Mart doesn’t yet have a true online grocery business in the U.S., its overseas Asda subsidiary has been operating that way in the U.K. One analyst tells CNBC that Asda’s experience in dealing with online matters might help stateside Wal-Marts gain an advantage in hawking groceries online.
Forget the beef. Where’s the profit?
Will the move to capture grocery market share pay off for Amazon or Wal-Mart? Can it possibly, with typical grocer margins ranging from 2 to 3 percent – before hits like taxes and interest are taken into account?
Likely so. After all, walking in to a Wal-Mart to buy groceries will probably trigger an impulse to buy something else. Something that’s priced at a higher margin per unit. And still probably underpriced when compared to the competition.
Same would seem to go for the likes of Amazon, which already makes a habit of “suggesting” other products to consider when buying something online. Need a pan to sauté those vegetables? Here’s 40% off our already discounted price, TODAY ONLY, if you include the pan in your grocery order. Would shipping the item separately put a damper on buyers’ enthusiasm? Maybe. The again, maybe not. Were Amazon to throw in free 2-day delivery on anything else purchased online for the next, say, 90 days, grocery shoppers could become online devotees pretty quickly.
And when someone finally invents a reliable method to instantly deliver the goods – as in Star Trek-beaming them to your kitchen — you can bet that both Amazon and Wal-Mart will already be poised to cash in there, too.