We knew Amazon (NASDAQ: AMZN.US)had an appetite for setting up a net-based grocery delivery service but cooking up a supply agreement with big four supermarket WM Morrison (LSE: MRW) was a coup. Markets may have beenlicking their lipsbut the announcement willhave left a nasty taste in the mouths ofmanagement at Tesco (LSE: TSCO) and J Sainsbury (LSE: SBRY).
Amazon launched its nationwide same-day grocery delivery service Amazon Pantry last autumn, but the hook-up allows it toofferfresh and frozen food for the first time. Subscribers toPrime Now and Amazon Pantry will soon be able to order hundreds of Morrisons products for home delivery. It isnt hard to see the practical benefits to Amazon, which can now offer perishable items such as soups and orange juice without having to build up acostly supply chain first.
Its even easier to see the attraction for Morrisons. The mere fact that it has hooked up with a big-hitter like Amazon will raise its standing among investors. It also allows the Bradford-based supermarket to access more customers in the wealthy Greater London area, where its presence is minimal. Maybe it will put a stop to all those sneers about being slow-off-the-blocks in the online grocery race.
The stock was already on a roll after hitting a low of 139p in December. Today, Morrisonstrades at nearly 204p, some 46% higher than its pre-Christmas low. As weve seen in the oil sector, contrarians brave enoughto buy apparently burned-out stocks can makered-hot returnsfrom time-to-time.
Amazon and Morrisons may be enjoying each others company, but Tesco boss Dave Lewis hasbeen left feeling like a gooseberry. Despite its recent troubles, Tesco has always remained the big boy on the block, with the punching power to inflict serious damage onrivals ifit evergot its act together.
Tescohas neverthelessstruggled against German upstartsAldi and Lidl. Butnow the competition has got bigger and badder, especially given Amazons willingness to sacrifice short-term profits for long-term market share. Amazon Prime customers get free delivery for just 79 a year, against up to 5 a pop from the big four (who still make a loss on the 20 cost). Expect more complaints about Amazons relatively cushy tax arrangements, which give it another edge over Tesco and Sainsburys.
Delivering the goods
J Sainsburys share price has largely shrugged-off the threat but that may change as wewatch Amazons progress. Online groceries are big business for Sainsburys, with Q3 sales up nearly 10% and orders up 15%, and investors wontwant to see that slow or go into reverse.
Amazon still needs to prove that it can compete by offering customers the same level of choice as Tesco and Sainsburys, as I believe most online customers will prefer a one-stop shop. But given itstrack record, investors now have another reason to fearthe supermarket sector.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon.com. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.