Amazon.com is Coming for Your Grocery Store

Amazon.com (AMZN) might be bringing Amazon Fresh to a city near you–and hammering your grocery stock in the process. Deutsche Bank sees tough times for Supervalu (SVU) and Safeway (SWY)  if an when Amazon expands its grocery delivery service beyond its three current test markets, while Kroger (KR) and Whole Foods Markets (WFM) should be able to thrive.

Bloomberg

Deutsche Bank’s Karen Short and team explain:

So, who is most exposed to the Amazon.com competitive threat? To answer this question, we first looked for the U.S. markets that are most structurally economical to an online grocer; that is, markets with: 1) a large population, 2) high population density, and 3) relatively high prices. As identified by Oliver Wyman, the most appealing markets (lowest market share breakeven levels) include NYC (0.3% breakeven share), LA (0.3%), Boston (0.9%), and San Fran (1.0%)…

…we believe the conventional grocers in our universe – namely, Safeway, Supervalu, and SpartanNash (SPTN)—are most at risk from Amazon.com’s expansion. Kroger should fare better due to its very strong price positioning and weighted-average market share positions. In addition, we believe that Kroger may actually end up as a net beneficiary of Amazon.com’s expansion, as grocers with lower market share positions (outside the top 5) are likely to exit/close, leaving more share to top players such as Kroger. The natural/organic specialty players are also better positioned to absorb Amazon.com’s expansion, with Whole Food Markets least at-risk due to its product mix (e.g. prepared foods), differentiated format, strong EBIT margins, and very strong balance sheet.

Morgan Stanley’s Vincent Sinisi says online is “not a major threat to brick and mortar food retailers.” He explains:

Surprisingly, our AlphaWise survey showed that consumers' interest in online ordering (either to be picked-up at store, or delivered to home) is very low…only 12% of consumers surveyed said they would be ‘very likely’ to order groceries online in the next 6 months if the offering were available. This reflects the fact that consumers like to see and choose the food they're purchasing, especially perishables. We believe this dynamic largely insulates traditional food retailers (both conventional like Kroger, and specialty like Whole Foods Market and Sprouts Farmers Market (SFM)) from online competition.

Shares of Amazon.com have gained 0.9% to $327.20 at 3:31 p.m., while Whole Foods Market has risen 0.5% to $39.15, Sprouts Farmers Market has jumped 4.3% to $32.62, Kroger is unchanged at $49.17 and Supervalu is down 1.9% at $7.66.