Amazon Go: An E-Tailer's Relentless Pursuit of Grocery Success
- By Sangara Narayanan
Amazon (AMZN) today announced the launch of Amazon Go, a physical grocery store in downtown Seattle that is part of the retailer's initiative to take a shot at the $600 billion-plus U.S. grocery market. The "self-driving" grocery store has no checkout lines and no cashiers. Shoppers will sign into a special app with their Amazon credentials, walk in, take what they need and walk out. The app does the billing for them.
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Amazon has been trying hard to increase its share in the grocery market but, despite kicking off its grocery dream nearly 10 years ago, its foray into the time-sensitive grocery delivery market has been a stop-and-start affair for the company.
By using the Amazon Go app instead of a physical checkout system, Amazon wants to do away with long lines that are typical of large retail stores. Amazon utilizes machine learning, computer vision and other AI technologies to keep track of what items you pick, and bill you accordingly. The store is currently in "beta" mode, which means only Amazon's own employees are allowed to use it. Public access should come early in 2017.
Though there are several questions regarding how feasible it will be to operate a store in this fashion, how Amazon will stop shoplifters and so on, the company will be aggressively testing the model before they open it up to the public.
The focal point of this announcement appears to be on technology, but the reality is that Amazon has been itching to enter the brick-and-mortar space - the very space that it has been continually disrupting over the past 18 years since announcing it would go beyond selling books.
Amazon is well aware that when it comes to groceries, most shoppers prefer to actually see, touch and even smell the product before they buy. But apart from this angle, there is also the problem of shipping perishable items. If there is a physical store nearby, that task become infinitely easier. In addition, they can better control inventory levels and manage procurement costs if they have multiple locations.
That is the direction Amazon is likely to take with this. Of course, the cashierless experience is a novelty that most people will want to try out as well, but Amazon's key focus will definitely be around learning the ropes in the grocery business. And this is something they must absolutely have if they ever want to take on the bigger chains.
Without a large footprint, however, Amazon knows that it will continue to struggle in this segment. Lessons from Prime Now and all their earlier efforts will have taught them that.
The grocery segment's potential is huge and grocery remains the weakest link in Amazon's retail chain. By entering the brick-and-mortar space, Amazon's physical stores can spread their footprint all over the country. Apart from helping them move perishable items more efficiently, it will also help them bring down the cost of last mile delivery, which is the most expensive leg in their logistics chain.
If this initiative is successful - and at this point there is no reason for it not to be - it will singlehandedly increase the potential market size for Amazon, giving them a huge runway to add to their top line within the United States. If the strategy follows the company's proven expansion trajectory and Amazon tastes success in its home country, it will undoubtedly start rolling out stores in other markets as well.
Another offshoot of this could be an expansion into non-perishable items as well. If that turns out to be true, Amazon Go may well be the proverbial stone that gets two birds - a space in physical retail and a strong grocery line to complement it.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
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