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What Will Amazon Do With 2,000 Grocery Stores?

By Markets Fool.com

Amazon.com(NASDAQ: AMZN) has plans to roll out 200 grocery stores a year until it reaches 2,000 location in the United States. These new retail outlets would be about 30,000 square feet, but the company will not be using a one-size-fits-every-market approach. Instead, Amazon has a number of different formats it's testing before it starts rolling out the new stores in serious numbers.

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In this clip fromIndustry Focus: Consumer Goods host Vincent Shen is joined by Motley Fool contributor Daniel Kline discuss what these stores might look like. They also explain how having more locations lets the online retailer exploit the distribution it has already built.

The big questions, of course, are whether consumers want this and whether Amazonis entering an already too-crowded market.

A full transcript follows the video.

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Vincent Shen: Just to give everybody a little bit of details, you mentioned 2,000 locations -- based on the current planning, if the tests are successful, the company sees...

Dan Kline: And this is wildly speculative, in terms of where we are.

Shen: Yeah. The company sees a potential rollout of 200 store openings per year, eventually reaching that network of 2,000 locations that you mentioned. Again, you touched on this earlier: The idea is they get supply through some of the innovation they've seen in the distribution centers, the expansion of that network. The company is constantly perfecting that part of the logistics.

Kline: Everything they do makes the math better on their distribution network. So, they can use one warehouse to supply trucks, drones, grocery stores, blimps that throw fruit at you, whatever it is. Obviously, everything costs less.

Shen: The thing is, the size of the opportunity, if they were actually able to get it out to that kind of scale, thousands of locations, it is sizable in the fact that the grocery business makes up about 20% of consumer spending in this country. It's like an $800 billion industry -- pretty large. Right now, with their current Fresh model with the delivery, that's like a sliver, like 2% of that market.

Kline: Do you do the grocery shopping in your house?

Shen: My wife and I do it together.

Kline: Do you go to the grocery store?

Shen: Yes, we absolutely go to the grocery store, because we prefer that experience, being able to pick our produce and things like that.

Kline: My wife and I split the shopping, and we go to two different grocery stores: the one that's closest to our house, and the Whole Foodsthat's second closest. If an Amazon opened, even though I'm a devoted -- I buy from Amazon almost every day, I have an Echo, I use a Kindle, I have Fire TV -- if Amazon opens half a mile down the road from Whole Foods, I would go there twice a year as a novelty.

Shen: [laughs]

Kline: I think that's the model for grocery stores. Unless you can be an Aldi, or something that's a really different shopping experience, am I really going to drive farther?

Shen: Yeah, but isn't the potential there, if there's a company that can really gather the data on what people want, and potentially curate the product offerings so people are like, "This is really a place I want to go; it has everything I need."

Kline: Amazon does have patents on knowing what you're going to order before you've ordered it. You've already picked your Christmas gift -- I don't even have to order it.

Shen: I have an interesting excerpt, here. GeekWire managed to get ahold of planning documents. They describe how one of these new retail operations might operate. I think it's really interesting, I want to share it with the listeners.

It says, "When placing an online order, customers will schedule a specific 15-minute to two-hour pick up window. Peak time slots will sell out, which will help manage traffic flow within the customer parking adjacent to the building. When picking up purchased items, customers can either drive into a designated parking area with eight parking stalls where the purchased items will be delivered to their cars or they can walk into the retail area to pick up their items. Customers will also be able to walk into the retail room to place orders on a tablet. Walk in customers will have their products delivered to them in the retail room." So, a lot of different options there.

Kline: I mean, it's very smart, but there's a lot of customer education.

Shen: This kind of reminds me, frankly -- maybe not the pick-up aspect, but the tablet order, for example -- of the new small-format stores that Whole Foods have launched with their 365. They've integrated a lot of technology into those locations. In terms of the handful of locations that are currently open, it seems like early results are quite positive. So, maybe that is a proof of concept, to an extent, for what Amazon sees, here.

Kline: It is. And McDonald'shas had great success in Europe moving to a tablet ordering model. It does take people out of the equation, so these become cheaper stores to run. If you can manage the parking lot, you don't need as big of a parking lot, so your rent becomes lower. So in theory, you start to have significantly less overhead, and maybe you can put that into pricing. But, once again, it's solving a problem that might not be there. It's not that hard to get groceries. Non-perishables, Amazon can deliver me. I don't know that I want to get my produce or my meat without touching it or looking at it. And we've seen a lot of rejection of that model. So, I get it, New York, Seattle, there are going to be markets where convenience is key. But in suburbia, where people are already driving to places, it just seems like a very niche focus. And a 30,000-square-foot store is not a small store. These are not 1,500 square foot hyper-focused warehouses. They're still pretty big footprints.

Shen: Yeah, that requires a lot of planning, in terms of finding the right locations. It's expensive to develop larger stores.

Kline: They have picked a good time to be in the real estate business. There are a lot of Sears that are now available. [laughs]

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.