This Is Going to Be Amazon.com's Next Major Growth Driver

Rich Duprey, The Motley Fool

There's a good reason Walmart (NYSE: WMT), Kroger (NYSE: KR), and other supermarket chains are rapidly building out their online grocery options: Amazon.com (NASDAQ: AMZN) is running away with the category, and as more grocery shopping moves online, it may develop an impenetrable lead over the competition.

Delivering the goods

One Click Retail recently reported that the inflection point for Amazon's future dominance over the space was its acquisition of Whole Foods Market. Although it gave the e-commerce leader just 470 stores at a cost of $13.7 billion, a price tag orders of magnitude larger than the $2 billion in sales Amazon generated from online grocery sales, it spurred a renewed interest by consumers in the segment.

A smiling man in a blue shirt carrying a box full of fresh produce and milk and about to hand it to a woman customer

Image source: Getty Images.

Traffic at Whole Foods stores jumped 25% in the days after the purchase and sales at Amazon Fresh, its online grocery store, experienced a big spike in traffic, even though the products hadn't even been offered yet. When Amazon.com followed by cutting prices on Whole Foods' 365 discount brand on its site, they subsequently sold out in many instances.

Ultimately, Whole Foods will be the vehicle that drives the online retailer to completely own the market. Weekly sales on Amazon Fresh started 2017 at around $3 million; by the end of the year, they were over $7 million per week and had hit an estimated $350 million in total sales.

The footprint to grow

In theory, Amazon shouldn't be doing so well. Walmart has some 4,000 stores that effectively can serve as distribution centers for the retail king, and they've bolstered its digital growth plans, leading to 50% growth in net e-commerce sales in the third quarter. Although that includes all products Walmart sells online, Slice Intelligence noted that in the second quarter Walmart Grocery made up more of its U.S. e-commerce sales than Sam's Club and Jet.com combined and that its own growth was likely the catalyst for Amazon buying Whole Foods.

Similarly, Kroger has almost 2,800 stores that can serve the same function and its recent discussions with Alibaba, Overstock.com, and Boxed suggest the pure-play grocer understands the threat it's facing and is trying to close the gap in a hurry.

If a substantial response isn't received soon from Walmart or Kroger, it will be Amazon's game to lose. Just last week, the latter announced that its Prime Now two-hour delivery service for groceries, produce, meat, and seafood is launching from Whole Foods in select markets, including Austin, Cincinnati, Dallas, and Virginia Beach, with other cities to follow later this year. There's also an "ultra-fast" one-hour delivery option for an additional $7.99 on orders of $35 or more.

It was certainly always a matter of when, not if, Amazon.com would start offering its Prime members deliveries of groceries from Whole Foods, which was the reason meal-kit delivery service Blue Apron had its IPO wrecked last year in the aftermath of the acquisition and has failed to recover since.

A huge opportunity... for someone

The online grocery industry, despite existing for decades now, is still in its infancy, but it has also matured dramatically from the days when Webvan served as one of the poster children for the dot-com boom that quickly flamed out.

Depending on whose forecasts you read, online groceries could explode from a $13 billion industry today to over $100 billion by 2025. A good case can be made that most of that exponential growth will go to Amazon.com, meaning groceries more than anything else will be its next major growth driver.

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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. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.