Although Amazon.com, Inc. (NASDAQ:AMZN) has traded higher by 25% over the last 12 months, slightly outperforming the Dow Jones Index. Yet, in the last week the stock has increased 3.5% — compared to a broader market loss — due to the company’s long awaited plan for expansion through grocery operations being announced.
Amazon.com, Inc. (NASDAQ:AMZN)’s expansion into grocery has been anticipated for the better part of three years, as many wonder if groceries can produce a new leg of growth. It is rumored that Amazon.com, Inc. (NASDAQ:AMZN) will first rollout the service in 40 markets.
Over the last decade, Amazon.com, Inc. (NASDAQ:AMZN) has drastically changed the retail landscape for technology companies such as Best Buy, but also the likes of Wal-Mart due to Amazon.com, Inc. (NASDAQ:AMZN)’s retail presence. Now, we’ll wait to see whether this breaking news will be disturbing for big chain food markets such as Safeway Inc. (NYSE:SWY), SUPERVALU INC. (NYSE:SVU), and The Kroger Co. (NYSE:KR).
Last year, Amazon.com, Inc. (NASDAQ:AMZN) reported total sales of $61 billion. The U.S. grocery business was estimated at $568 billion last year. Therefore, Amazon is entering a massive business relative to its current operations.
With online shopping becoming more popular by the year — estimated at 20% of purchased products — Amazon could very well control a large piece of the grocery market. For the sake of argument, let’s assume 5%, if so, Amazon would earn almost $30 billion in additional annual revenue; or 50% greater than current revenue.
In addition, Amazon is testing a new “Prime Fresh” service similar to “Prime” where members pay $299 annually to receive same-day or next-day orders on groceries; including more than 500,000 household products. This could be huge for the company, as Prime has been largely successful due to savings and rapid shipping. Prime is estimated to have more than three million users, and with grocery having the potential to drastically increase sales, that figure could rise rather quickly.
There is one other impact that grocery could create for Amazon, and that’s with advertising. The company is already expected to generate $835 million from advertising, up from $610 million last year. This new large grocery segment could catapult ad revenue in an industry that is unlikely to return a profit. Thus, the growth from advertising could be the segment that produces profit growth for the company. Looking ahead, these developments look to be highly lucrative for the company, and possibly investors as well.