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Amazon won’t obliterate the grocery store industry

Amazon’s penchant to slash prices and stick it to its retail rivals will wreak havoc on the primary grocery store chains in America such as Kroger and Walmart. Or so says a stock market that has been trained to price in a slow death by Amazon (AMZN) at the mere whisper of the digital beast entering a particular segment.

Shares of Kroger and Walmart dropped 4.5% and 1.1%, respectively, on Friday on a report that Amazon was looking to open grocery stores throughout the country. The knee-jerk reaction of the market was not unlike when Amazon paid $13.4 billion to buy organic grocer Whole Foods in 2017. Nor was it too far removed from the hit some health care stocks received when Amazon bought mail order pharmacy PillPack in July 2018.

Investors instantly assumed the worst for U.S. grocery stores in the latest example of Amazon madness: thousands of physical Amazon grocery stores spanning every state by 2025 that would be selling $0.50 organic lemons to Prime members and $1 almond milk to those that rent five pieces of Amazon’s original content each month.

But that snap judgement by the market is getting absurd.

Whole Foods has been a colossal failure for Amazon. Sales continue to be under pressure despite the stores being outfitted with yellow Amazon lockers and Prime sign-up stations. Customers still view Whole Foods as Whole Paycheck. And as Yahoo Finance has reported, Amazon is now shuttering Whole Foods’ value focused 360 locations.

In short, don’t be so fast to assume Amazon will conquer the grocery industry.

Amazon getting big into groceries won’t be easy

Amazon is reportedly planning to open dozens of grocery stores (separate from Whole Foods) in several major U.S. cities. The stores are said to offer a wider array of products and lower price points compared to Whole Foods. Amazon’s first store of this kind is expected to open in Los Angeles by year end.

The push into mass market groceries would be quintessential Amazon.

More grocery stores gives Amazon an important source of household data and shopping frequency, points out Morgan Stanley analyst Brian Nowak. Success in grocery, says Nowak, brings Amazon a greater market share of trade spend budgets (think vendors like PepsiCo) that could boost the company's surging advertising business. And finally, the stores could help propel sales of Amazon’s high-margin private label goods and spur more Prime accounts.

Empty interior with logo at Amazon Go concept store, a physical retail store operated by Amazon in which shoppers are able to take items from shelves and exit without a checkout process, having their items automatically charged to their Amazon Prime account, San Francisco, California; the store uses advanced machine vision and artificial intelligence technologies to automatically record purchases, December 25, 2018. (Photo by Smith Collection/Gado/Getty Images)
An Amazon Go concept store, a physical retail store operated by Amazon in which shoppers are able to take items from shelves and exit without a checkout process, having their items automatically charged to their Amazon Prime account, San Francisco, California. (Photo by Smith Collection/Gado/Getty Images)

But it would be asinine to think Amazon could run roughshod over the major grocery chains anytime soon (if at all).

For one, Amazon is up against an army of formidable store networks. Kroger, Walmart and Target almost operate a combined 10,000 stores in the United States. Walmart Sam’s Club and Costco weigh in with more than 1,100 membership clubs in America. Not only are their stores in some of the best locations, but they have unmatched supply chains in the fresh food business. All also continue to push deeper into online grocery delivery.

Secondarily, opening grocery stores won’t be cheap for Amazon. Morgan Stanley’s Nowak estimates twelve stores — at 35,000 square feet in size — would cost Amazon a whopping $100 million to build. “Barring acquisition, however, we would expect any roll-out to be slow given Amazon’s mathematical, methodical and ROI-driven manner of investment,” Nowak says.

Remember that Amazon isn’t just a retailer. It needs a good bit of capital to support its leading Amazon Web Services cloud business and Jeff Bezos’ vision for grandeur when it comes to original movie content. Amazon further has large capital requirements for Whole Foods and initiatives to build its own fleet of delivery trucks and cargo planes.

All of these businesses have to be nurtured — it’s not as if Amazon can go full bore into grocery stores without harming one of its crown jewels.

Relax about Amazon

Amazon can’t be a master of everything right now, or in the future. And if you keep that in mind, then several profitable investments could probably be made into companies that will stay in front of Amazon for years to come.

The latest: big grocery store chains.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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