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The Online Grocery Market Is Amazon's to Lose

Adam Levy, The Motley Fool

Groceries will be a $10 billion business for Amazon (NASDAQ: AMZN); it's just a matter of when. Amazon made that pretty clear when it acquired Whole Foods Market for about $13 billion last summer. That acquisition helped spur Amazon's online grocery sales to $2 billion last year, according to estimates from One Click Retail.

Overall, Amazon took 18% of the online grocery market in the U.S. last year, twice as much as its next closest competitor, Wal-Mart Stores (NYSE: WMT). The big-box retailer has taken steps to rapidly expand its online grocery ordering availability, now reaching over 1,000 stores. If Amazon wants to turn online grocery shopping into another one of its $10 billion businesses, it will have to take further steps to expand its offering.

A grocery bag spilling its contents on a table.

Image source: Getty Images.

Online grocery sales are exploding

Online grocery sales were somewhere around $13 billion in 2017, according to various estimates. That number could rise to $41 billion by 2022, according to Packaged Facts. And by 2025, the online grocery industry could generate $100 billion in sales, representing 20% of all grocery sales, according to FMI and Nielsen.

The vast majority of those sales will come from so called "center store" items. Supermarkets place fresh produce, meat, dairy, and baked goods around the perimeter of the store, but shelf-stable items fill the aisles in the center. Consumers are most comfortable purchasing those items online. FMI and Nielsen expect 40% of "center store volume" to shift online by 2025, double the overall market share of online grocery sales.

That's not stopping competitors from trying to win sales of fresh items online. Wal-Mart's online order and pickup system is well designed for customers to pick out fresh food. With around 4,000 retail locations in the United States, Wal-Mart has a huge advantage in distributing fresh groceries to online customers. Amazon, meanwhile, is (extremely) slowly expanding its AmazonFresh service offering same-day grocery delivery.

How Whole Foods spurred growth in 2017

The biggest contributor to Amazon's 59% growth in U.S. grocery sales during 2017 was the acquisition of Whole Foods. The acquisition brought attention to the online retailer's grocery products even before Amazon closed the deal. One Click says Amazon Fresh sales increased shortly after the announcement.

More importantly, Whole Foods lent its 365 Everyday Value private label products to Amazon's online marketplace. That proved to be key, driving Amazon Fresh sales higher still after the acquisition closed in August. The 365 label alone drove $11 million in sales, Amazon's second-biggest private label across its retail operations after AmazonBasic. The Whole Foods brand affinity combined with Amazon's broad reach made the move a success.

What Whole Foods brings to the table going forward

The key to the Whole Foods acquisition is that Amazon becomes a big buyer for grocery items, giving it buying power on the scale of other major grocery chains. On top of that, Amazon is now receiving grocery shipments at about 450 locations. That's a recipe for the expansion of AmazonFresh to more markets.

That's a step Amazon will likely have to take if it wants to maintain its lead over Wal-Mart and the rest of the competition. Wal-Mart is already planning to nearly double the number of stores offering online grocery pickup this year. Smaller grocers are looking at partnerships and acquisitions in e-commerce to compete as well.

The next $10 billion business?

By the sheer fact that online grocery sales are booming and Amazon has a tremendous lead in online retail already, Amazon will get to $10 billion in online grocery sales in the near future. Even if its share falls to 10%, it could reach $10 billion by 2025, according to the estimate from FMI and Nielsen.

I think Amazon will get there much sooner. Whole Foods provides the brand recognition and the infrastructure to expand online grocery sales through mechanisms like online order and pickup or launching AmazonFresh in more markets. Amazon is also experimenting with meal kits, representing yet another avenue to drive grocery sales. And as Amazon works to draw more customers to its brick-and-mortar grocery stores, it will build up brand equity that could translate into online sales as well.

The online grocery market has the potential to become a $10 billion business for Amazon by the start of the next decade if it takes steps to expand quickly. Considering the growth of the overall market, it would certainly behoove Amazon to keep improving its online grocery offerings.

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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.