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Fresh Idea From Amazon.com, Inc. (AMZN)?

What Amazon Fresh means for Costco

Costco Wholesale Corporation (NASDAQ:COST)’s business model is vastly different than its competitors. The company charges an annual membership, about $55, and then prices its products around 15% above cost. Almost all of Costco’s profits come from the membership fees, and this allows Costco to have extremely low prices.

You could argue that Amazon.com, Inc. (NASDAQ:AMZN) is attempting the same type of model with Amazon Fresh, but that would require the service itself to at least break even. This is unlikely given the delivery overhead, something that Costco doesn’t have to deal with.

To some degree Costco Wholesale Corporation (NASDAQ:COST) is an experience, although not to the same degree as Whole Foods. People like shopping at Costco, something that is rarely said of traditional supermarkets. The low prices pay for the membership very quickly, and socially conscious shoppers appreciate that Costco pays high wages to its employees. And with a high membership renewal rate a Costco membership is extremely sticky. Amazon Fresh will not put a dent in the Costco Juggernaut.

The bottom line

Grocery delivery is a strange business. The market seems small, as people who shop at traditional grocery stores or chains like Wal-Mart care more about price than convenience. The target market appears to be the higher-end shopper who frequents Whole Foods or privately held Trader Joe’s, but it’s questionable whether or not convenience would trump the benefits that these types of stores offer. And environmentally it seems that door-to-door grocery delivery has a much larger carbon footprint than other options, potentially turning people off from the service. I don’t think that Amazon Fresh will revolutionize anything, instead being just another profitless business for Amazon.com, Inc. (NASDAQ:AMZN).

The article A Fresh Idea From Amazon? originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Costco Wholesale, and Whole Foods Market (NASDAQ:WFM). The Motley Fool owns shares of Amazon.com, Costco Wholesale, and Whole Foods Market. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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