What is Amazon (AMZN)? The question concerning how best to describe the all-conquering mega-cap is one that has popped up more frequently recently. Of course, traditionally known as an e-commerce company, its forays into cloud services, media, and logistics, suggests that, by now, it is much bigger than that.
It should be noted that, so far, being a physical retail entity has not been added to this list in a meaningful way. However, William Blair analyst Dylan Carden believes that if Amazon’s ambitions in the grocery segment are to be fulfilled, it will need to move from the virtual realm into the physical world.
“Our research suggests that this will be the category that pulls the company further into the physical retail channel given the importance of stores in capturing market share, and likely low ultimate online penetration rates in the category,” Carden said.
It’s no wonder Amazon has been eyeing the grocery opportunity. After all, it is a market that in the US alone is estimated to be worth around $1 trillion, and not much of that is derived from online sales. According to Carden, it is also one which suits Amazon to a T, as groceries are “a high-frequency, low-margin product type, where logistics and operational excellence matter.”
Carden believes that over the next decade, Amazon can increase its total grocery market share from 2% to 15%. “This scenario would suggest the grocery category on its own could effectively double North America revenue, adding an incremental $195 billion to sales, only a quarter of which we estimate would be coming from the online channel,” said the 4-star analyst.
Amazon has already opened one grocery store in Seattle and plans on opening another in the Chicago suburbs sometime this year. That being said, fully penetrating the space won’t be easy. The grocery market is dominated by massive established chains. Giants such as Walmart and Kroger rule the online grocery space, mirroring their physical dominance. But don’t rule out Amazon becoming an increasingly big player in the sector as the decade progresses.
All in all, Carden keeps an Outperform rating on Amazon, although he has no set price target in mind. (To watch Carden’s track record, click here)
The analyst community is bullish on Amazon, too. With a lone Sell and 2 Holds up against 39 Buy ratings, Amazon has a Strong Buy consensus rating. However, there’s modest upside of 1% in the cards, should the $2,755.11 average price target be met over the coming months. (See Amazon stock analysis on TipRanks)
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