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Amazon's Next Step in Grocery Could Hit Walmart Where It Hurts

Adam Levy, The Motley Fool

Amazon (NASDAQ: AMZN) has been working to bring grocery shopping into the age of online retail for several years. Walmart (NYSE: WMT) may have already done it.

The big-box retailer's online order and curbside pickup platform has propelled its online sales growth over the past year or so while bringing new customers to its website and stores.

That's why Amazon is reportedly working on a new grocery store format that puts online order pickup and delivery at the forefront, according to The New York Times. The stores will feature a smaller shopping footprint than most supermarkets but could have ample storage. Previous reports indicate Amazon was working on a low-priced grocery store, as well as scouting locations that could combine a grocery storefront with ample warehousing space in the back. Both are in line with the more recent report about Amazon's grocery plans.

Designing stores with online grocery ordering in mind from the start could put Amazon at an advantage over Walmart and other grocers trying to retrofit their stores for online ordering.

A produce section of a grocery store.

Image source: Getty Images.

A more economical store

Even before Amazon bought Whole Foods a couple of years ago, management had an idea for a unique grocery shopping experience. It wanted to create a store with a small fresh-food shopping area. Customers could order nonperishable items from an app and they would await them at the checkout counter. While that store format might not be exactly what Amazon is planning today, stores with a smaller shopping area could be very economical for the company.

First of all, keeping most items in the back away from customers should enable Amazon to store items more efficiently and for employees to pick that merchandise without customers getting in the way. That means it can keep more items in stock and fulfill online orders more quickly. 

Additionally, Amazon could place these new grocery stores near existing Whole Foods locations to help reduce supply chain expenses. The new stores could serve as a warehouse for Whole Foods items as well.

Designing the stores with online ordering in mind should also enable a smoother flow for shoppers. That could result in greater "foot traffic" even if a lot of customers never set foot in the store. From the way the parking lot is designed to the checkout process, everything could be tailored to get customers in and out as quickly as possible. That could give Amazon a big advantage over Walmart and other competitors that have designed their stores around consumers coming in and perusing the aisles.

Amazon is still way behind Walmart

Walmart's online grocery shopping platform is really resonating with consumers. The company plans to offer curbside pickup at 3,100 locations by the end of the year, and it's far and away the leader in the space for grocery pickup. The click-and-collect channel could account for $35 billion in grocery sales next year, according to an estimate from Cowen.

If Amazon is pursuing this venture in earnest, it'll take years to catch up with Walmart, covering a similar population with a new chain of grocery stores designed for online ordering. That said, a better-designed store integrated with Amazon's other efforts (including the Whole Foods chain or Prime Now) should enable Amazon to grow quickly and take share from the market leader.

About 82% of online grocery shoppers buy at least some of their items from Walmart.com, according to a recent survey from Field Agent. By comparison, just 35% purchase from Amazon.com. 

The majority of shoppers expect to make more of their grocery purchases online in the future. As things stand, Walmart is poised to win the majority of those purchases, which will continue to fuel its online sales growth, potentially cutting into Amazon's core business. Amazon's plan to fight back has very good potential to put a dent in Walmart's progress.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.