The US online shopping behemoth is sharpening its knife as it looks to carve out a bigger slice of the $102 billion supermarket industry for itself.
Amazon.com is launching its "Subscribe & Save" program in Australia early next year, according to the Australian Financial Review, and experts think the service could be a double whammy for the Woolworths Group Ltd (ASX: WOW) share price and Coles Group Ltd (ASX: COL) share price.
The WOW share price dropped 0.6% to $28.29, the COL share price fell a similar amount to $12.16 and Metcash Limited (ASX: MTS) share price tumbled 2.1% to 2.32 at the open while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index dipped 0.3%.
The new subscription service allows consumers to purchase regularly bought items, such as toilet paper and pet food, at a big discount.
The online company said subscribers can typically save 15% on the items, which will be delivered together at fixed intervals nominated by the customer.
Two risks factors
Amazon claims this is a very popular service overseas and it comes at a time when the company is accused of undercutting the major supermarkets on price.
But price is only but one issue that Woolies, Coles and Metcash have to contend with. Retail experts believe Subscribe & Save will undermine the business model of the major supermarkets as it will remove the need for shoppers to visit physical stores on a regular basis.
Supermarkets (and department stores for that matter) have honed their skills to bring shoppers through their doors as the foot traffic allows them the opportunity to sell more items to the consumer (how often have you gone into a shop but come out with more than you intended?).
They often lure you in with "loss leaders". These are items everyone needs but where the supermarket makes no money (or sometimes even a loss) – such as milk, bread, toothpaste, etc.
Should investors worry?
Fortunately, Amazon has yet to get into fresh food due to the logistical challenge, so shoppers still have a reason to visit stores regularly.
A quick check on the items available on the US-version of Subscribe & Save were mainly pantry food (not fresh food).
There were hotdog buns and sausages listed but I don't think that can be counted as fresh food – at least not in my book.
However, it's not inconceivable for Amazon Australia to add fresh food to the program at some stage given the population density compared to the US.
Amazon could serve 70% of Australia's population with just a few distribution centres in Melbourne, Sydney and Brisbane.
It's too early to be ditching your Woolworths shares and Coles shares but investors would do well by keeping a close eye on what Amazon is up to next.
