Amazon Is Just Getting Started With Groceries

It's been about a year since (NASDAQ: AMZN) closed its $13.7 billion acquisition of Whole Foods Market. Since then, Amazon has started integrating its Prime membership and the brick-and-mortar grocer with special discounts, free delivery and in-store pickup options, and even greater savings for Amazon credit card holders.

Whole Foods and Amazon still represent a small share of the $641 billion U.S. grocery market. Walmart (NYSE: WMT) is the clear leader, and is making moves to ensure it stays there with its efforts in online grocery ordering. But Amazon is certainly not going to stand down anytime soon.

Amazon's largest expansion ever

Food and beverages account for 20% of consumer spending excluding automobiles. Amazon has been working on getting into the market for more than a decade since launching AmazonFresh in Seattle. The acquisition of Whole Foods gives it the scale it needs to take the next step in food and beverages, but there's still a lot of investment left for it to make.

Amazon is currently offering Prime members free delivery or free curbside pickup at select Whole Foods locations. Expanding that service nationwide to all 450-plus Whole Foods locations is the first step in grabbing share from Walmart. Walmart offers free pickup at over 1,800 locations and delivery from 325 locations as of the end of July.

Despite Walmart's advances over the last couple years, Amazon is firmly in the lead when it comes to online orders for shelf-stable grocery items like ketchup, canned goods, or pasta. But Amazon still needs to solve issues with fresh food -- produce, meat, dairy, eggs, etc. -- which requires refrigeration and therefore need to be delivered quickly. With Whole Foods' footprint just one-tenth that of Walmart, its stores alone won't cover enough ground to compete everywhere.

But Amazon could invest in distribution centers with equipment to store fresh food specifically for online orders. It would also need to invest in the logistics to deliver fresh food in a timely manner. All of this is going to take time and money, and Amazon is willing to spend both.

Bigger than Walmart?

Analysts at MKM Partners believe Amazon could take over Walmart's mantle as America's largest retailer in just seven years if it continues to invest in groceries. By 2025, Amazon may take $0.14 of every dollar Americans spend. It's already set to take more than half of what Americans spend online next year.

A big key to getting there is growing its grocery business. About half of Walmart's sales, for example, come from groceries. That number is actually growing as it invests more in online grocery ordering.

By their nature, groceries require repeat purchases, and shoppers will keep coming back over and over again. That gives a grocery seller multiple opportunities each month to sell other items whether they be convenience items, impulse purchases, general everyday needs, or something else entirely like a new big-screen TV. Walmart has made a huge business on the back of its Supercenters, which combine a regular Walmart store with a grocery store.

With the shift to online grocery ordering, the opportunity to attract regular customers is up for grabs. Amazon is investing in order to seize that opportunity, and the Whole Foods acquisition is just the start. Establishing deeper integration with its Prime membership will make customers even more loyal, and make the Prime membership even stickier as Amazon rolls out more convenience services like free delivery nationwide. It's going to cost a lot, but the opportunity is massive.

Walmart certainly saw the threat coming, and when Amazon announced its Whole Foods acquisition, it doubled down on its online grocery efforts. Despite its head start, there might not be anything it can do to stamp out Amazon.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.