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Amazon mum on stores, but bullish on grocery

Analyst: Whole Foods, Kroger vulnerable amid Amazon expansion

Amazon officials late Thursday declined to address recent reports that it was looking into building grocery stores, but reiterated that groceries were a key part of its offering, and that it was exploring different ways of getting products to customers.

Brian Olsavsky, CFO of the Seattle-based retailer, in a conference call discussing quarterly earnings declined specifically to address what he called "rumors and speculation" around grocery stores, but said the company was pleased with results at a handful of physical bookstores, pop-up stores and pickup sites providing an alternative to shopping strictly online and delivery. A report earlier this week cited company documents contemplating building as many as 2,000 Amazon grocery stores following a test of units reportedly under construction in several markets. "We will try different delivery methods or pickup points or ways of getting product to customers, but [there is] nothing specific to point out on the grocery side right now," Olsavsky said.

Olsavsky confirmed the company was continuing to expand its Amazon Fresh program, adding the service in Dallas, Chicago, Northern Virginia and Maryland during the fiscal third quarter, and expanding to new ZIP codes within existing markets.

"We're very happy with the progression, both in the geographies that we've been in for a long time where we're at, continuing to add ZIP codes and additional neighborhoods and also in these new cities," he said. "Certainly [it is] a business where we continue to work on costs and profitability, but we are finding it's a very attractive service to our customers, which is what we're after."

In addition, Amazon this week said customers in Amazon Fresh markets can now shop for groceries directly through the website and separately, announced a fivefold increase in sales of its Dash buttons providing Prime members with convenient consumable reordering.

Amazon's financial results for the period, which ended Sept. 30, reflected the retailer's continuing investments in infrastructure to support these services. Net income of $252 million was below analyst estimates, but sales improved 29% to $32.7 billion.

In a research note Friday, analyst Scott Mushkin of Wolfe Research said Amazon's moves in grocery should bring additional pressure to cities already dealing with an overabundance of space devoted to food retail. Mushkin also believes demand is weakening, citing demographic trends, but said Amazon's focus on Prime consumers could prove especially problematic to Whole Foods and other staples retailers.

"With growth in the food-at-home industry very tepid, in part due to demographic headwinds, Amazon’s aggressive push is adding to the oversupply challenges in the industry," Mushkin wrote.

"We view Amazon's aggressive push of its Fresh offering to be particularly negative for Whole Foods as many of the Amazon Fresh markets are also large Whole Foods markets and there is likely overlap with customers given the make-up of Prime members. We also believe that Amazon’s move into consumables is starting to present challenges for the traditional supermarkets, including Kroger."

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