Here’s Another Way Amazon Refuses to Be Undersold

Source: http://www.flickr.com/photos/aurelijus/

Amazon (NASDAQ:AMZN) will not be undersold. That’s the beauty of this company and how it has taken market share from competitors from everything from cat food to digital programming. Now, Amazon is going to take on warehouse shops like Costco and Sam’s Club. That is impressive.

According to a recent article by USA Today, Amazon is about to unleash a new program that will encourage you to do your bulk shopping from the comfort of your couch rather than go out and fight the masses. The potential of this move cannot be understated as a shareholder. Who wouldn’t want to purchase bulk toilet paper, paper towels, dog food, etc., and then have it taken right to your door as opposed to spending time in the car or in the store? It’s a burden to go out and about, wasting gas at $3.47 per gallon. With online shopping becoming a larger part of retailer sales, Amazon is taking steps to further ensure it cannot be undersold.

Amazon is in the process of developing a new business division that will allow users to order big boxes of grocery store goods, paper products, etc., for a fixed shipping price. This beta testing level service will be called Amazon Pantry. Pantry is scheduled to launch in late 2014 and to start will include somewhere in the neighborhood of 2,000 products. It won’t just be bulk paper and food but will include cleaning supplies, home supplies, canned goods, and boxed items like cereal and starches.

Visitors to Amazon’s Pantry site will be able stock their digital carts with a predetermined-size box with as many of the offered goods as can be fit. Extra charges will apply for those goods exceeding the maximum weight limit and will include a nominal fee for shipping. This service is a huge gamble for the company but one that is likely to pay off. While Amazon may not take a lot of business from competitors, the move will allow the company to claim market share in the packaged food market.

You can imagine the difficulty for Amazon to penetrate this sector of retail. Think about it: The cost of shipping individual items generally exceeds the price it can ask for items that are in bulk, as they are often very heavy and/or exceedingly large, taking up a lot of truck/plane space that shipping services rely on. Let us take for example a 30-pack of Pepsi that may retail around $8.49 or so.

In general, for Amazon Prime members, the cost of shipping is free. But imagine if you tried to ship a case of soda yourself. It would likely run you $30-$40 because of the weight. Amazon gets good shipping deals, but the cost of the soda would be far less than the cost of shipping the case of soda, which weighs around 20 pounds. Amazon, which has lost money many quarters, simply could not afford to eat this loss. Having this Pantry service where it recoups some of the shipping costs would make it more economical for Amazon to deliver packaged foods in bulk to customers.

Thus far, about four fulfillment centers will partake in the Pantry service. It will be a beta program for a while, but if it takes off, estimating the anticipated revenue will be challenging. Needless to say, with Costco having $97 billion in sales last year, if Amazon can grab 2 percent of this, they are looking at $1.94 billion in revenue alone. Factor in sales at BJ and Sam’s Club and assume Amazon gets anywhere from 1 percent to 5 percent of market share in this sector, Pantry’s first full year of operation could roughly generate $3 billion to $15 billion in sales overall. Therefore, this move has the potential to be huge for shareholders of Amazon, and I would encourage shareholders to hold their positions.

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