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Sector Snap: Amazon broadens grocery service

NEW YORK (AP) -- Amazon.com's push into the grocery business could win over shoppers with convenience, but it faces a tougher challenge if the decision comes down to price, Janney Capital Markets said in a research report Tuesday.

Amazon has tested an online grocery service for almost six years in Seattle and on Monday it said it's bringing AmazonFresh to Los Angeles. The company may add dozens of markets.

Amazon is operating areas that have been a buzz saw for Wal-Mart.

"(Wal-Mart's) modest exposure in bigger cities provides some defense to their model, as the company has been locked out of many metro markets by unions and their cronies on the local zoning boards," analyst David Strasser wrote. "This new competitive push into grocery by Amazon is likely to alert the same unions going after (Wal-Mart)."

Jonathan Feeney, also with Janney, said that Wal-Mart Stores Inc. and CostCo Wholesale Corp. will be "willing to defend their territory on price as needed."

And Strasser believes that the two have a built in advantage on pricing, "where both perception and reality" of those prices will be difficult for Amazon to overcome.

That will make competition especially though, given that Amazon will need to fund all its growth with either newly built or extended distribution, Feeney said.

Particularly vulnerable, at least during any roll-out of Amazon's program, may be grocers that focus on urban areas, like Safeway and Whole Foods.

If Amazon pushes outside of the city, that's where it will face the most significant challenges from Wal-Mart or CostCo.

Wal-Mart dominates rural and suburban areas, Strasser said, regions where delivery will prove less economical for Amazon if it chooses to go head-to-head with Wal-Mart.

"We believe that ultimately grocery delivery will be somewhat limited to high density cities such as New York, San Francisco and Chicago, Strasser wrote. "Perhaps more, but suburbs and rural markets are likely to not face much from this threat."

People in L.A. can now order from more than 500,000 items for same-day delivery, the company said, including products from specialty stores around the city.

The service is free for Amazon Prime members for 90 days. After that, customers must sign up for a new Prime membership program that costs $299 a year. Delivery is free for any orders over $35.

Shares of Amazon.com fell $3.51 to $277.56 Tuesday.

Shares of Wal-Mart slipped 51 cents at $75.24. Shares of CostCo Wholesale Corp. gave up 6 cents at $110.37.

Target shares edged down 4 cents to $69.83.

Safeway shares rose 5 cents to $23.08. Shares of Whole Foods Markets Inc. fell 38 cents at $51.67.