Amazon’s Hand in the Expanding Online Grocery Delivery Market

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The coronavirus pandemic dramatically shifted how we purchase and receive our groceries day to day. Before COVID-19, penetration of the online grocery delivery market was slow, at a mere 24% in 2019.

For example, only 20% of US households were expected to use Instacart, one of the industry’s leading companies for grocery delivery, but now, order volume has increased by 150%.

In the fourth quarter of 2019, Amazon (NYSE: $AMZN), the e-commerce giant, was seen to have almost doubled their grocery delivery orders through Amazon Fresh and Whole Foods, relative to a year ago. A lot more people are becoming interested on obtaining these services. Specially now that it is easier to get an amazon coupon online.

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Source: Business Insider

Due to social distancing requirements in light of COVID-19, there has also been a shift in how consumers behave in how they acquire their groceries, and also new limits to achieving mass production and deliveries.

Amazon’s resources may not be able to satisfy the surging number of order requests with their current operations. For Whole Foods and Amazon Fresh customers, they have implemented a waiting list for grocery delivery orders and have restricted shopping hours at Whole Foods stores to prioritize existing online orders.

Adding about 150 new Whole Foods store locations and hiring an additional 75,000 workers, Amazon is rushing to keep up with orders.

Amazon reported that their grocery order capacity has increased by more than 60% during the pandemic and have as many as 50 times as many grocery orders.

The potential for growth in the grocery delivery industry may seem high for the forthcoming future, with the pandemic seen as merely a catalyst for the expected growth this industry would have eventually received at a slower pace.

“We believe customers are starting to notice and take advantage of [grocery delivery],” Brian Olsavsky, Amazon’s chief financial officer, said during Thursday’s earnings call.

“We will see where peoples’ tastes and preferences will take them, whether they go to Whole Foods stores, use Prime Now or Amazon delivery for their groceries. Right now, we’re really just testing and reacting to customer demands and preferences, and we’ll do so for the foreseeable future.”

Amazon has also continued with another project known as Ultra Fast Fresh, a new Amazon grocery delivery service open to the UK. With Amazon’s new introduction of Ultra Fast Fresh, a new grocery delivery service available in the UK, they aim to service about 40% of UK households by 2021.

This market entry would potentially provide a giant revenue boost to Amazon, and exemplifies how much potential there is in an industry that appears to be struggling to maintain the weight of its outstanding demand at the moment.

According to a survey, of the respondents, 52% had purchased groceries online within the past year, and 62.5% expect to buy them online in the future.

US online grocery sales were 22% in 2019 and have almost doubled to 40% in 2020.

A study by Neilsen with the Food Marketing Institute, suggested that online grocery sales would reach $100B and make up 20% of total grocery retail in 2025.

Instacart, a company yet to go public, has seen demand at levels they didn’t expect to see until 2025. They recently hired 300k new workers and are seeking to hire 250k more. They sold $700M worth of groceries per week in the beginning of April and reported their first ever monthly profit in April of $10M.

Other grocery delivery services like meal kits in particular have seen a substantial rise. This pandemic-dependent growth in sales is reflected in the large increase in stock prices, especially seen with Hello Fresh (OTCMKTS: $HLFFF), one of the leading, global meal kit providers.

 


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Despite Hello Fresh and others that struggle with customer retention and marketing costs, with the push from coronavirus, the revenue growth and rise in demand for online grocery is substantial.

Hello Fresh has gained a competitive positioning as an alternative to eating out and going grocery shopping. They have also experimented with 600 US Stop & Shops, prepared food vending machines in Europe, and may be expected to reduce their prices to get in with larger retailers.

With more people spending time at home, purchasing groceries online, and a growing trend of e-commerce, we have seen a temporary spike in demand at an exhilarated pace for convenient grocery deliveries this year.

Companies like Amazon, Instacart and Hello Fresh are stepping in and would be expected to grow as an alternative option for consumers from traditional grocery stores.

Even if this momentum naturally slows, online grocery delivery has exposed a value of convenience that will likely be adopted permanently by consumers.

 

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Jamie De Rouen

Equity Research Analyst

Jamie is a current undergraduate student studying business administration with a special concentration in finance and information systems at Boston University. She has a unique interest in exploring the prospects and possibilities of the FinTech industry and analyzing any potential areas for investment. If time would allow for it, Jamie loves to spend her free time hiking outdoors, attending local events, and cooking new recipes.

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