Tuesday, December 6, 2016

Amazon Takes On Tech’s White Whale: Grocery Shopping

Online retail giant aims to disrupt $795 billion U.S. grocery business with stores that don’t include checkout lines and other concepts.

By Therese Poletti
December 6, 2016

Amazon.com Inc.’s plans for its most ambitious brick-and-mortar effort yet aim to disrupt an arena seen as an Achilles' heel for Silicon Valley: The $795 billion grocery industry.

Amazon released a video Monday about a convenience-store effort called Amazon Go, one of three grocery concepts the online-retail giant is planning, according to a Monday report from The Wall Street Journal and earlier reporting from Business Insider. According to Amazon’s website, Amazon Go has been in the works for four years and weaves together a combination of machine learning, computer vision, artificial intelligence, sensors and RFID technology in what it calls “Just Walk Out Technology,” which rids the store of one of the biggest hassles of shopping, the checkout lines.

Amazon said Monday it plans to open its first small-format grocery store, Amazon Go, in Seattle with technology that allows customers to skip checkout. Pictured above, a prototype curbside pickup Amazon location in Seattle's Ballard neighborhood. Photo: Jay Greene for the Wall Street Journal

“No lines, no checkouts, no registers, no, seriously,” a video on its website says in a demo showing 20-something shoppers entering the store, scanning an app at the turnstile and simply walking out with their wares.

The ability to build its biggest push into physical retail from scratch with this type of automatic technology could be the ticket to further disruption of traditional brick-and-mortar retailers like Wal-Mart Stores Inc. WMT, -1.33% and Target Corp. TGT, -1.23% Grocery shopping for fresh food has long been a difficult but enticing arena for tech startups, which have put forth efforts like Webvan during the dot-com boom and now Instacart and its rivals, which offer grocery shopping as a service. Stores have even developed their own online options, such as Safeway.com, but Amazon has a good chance to crack into traditional grocery shopping with this hybrid effort, which addresses many of the issues consumers have with online grocery shopping.

John Blackledge, a Cowen & Co. analyst with an outperform rating on Amazon, wrote in a note to clients Monday that he believes the grocery business is Amazon’s “biggest potential source of revenue upside over time, with Go being another layer of Amazon’s multiplatform grocery strategy,” which also includes its Amazon Fresh and Prime Now two-hour delivery.

“We are encouraged by Amazon’s growing footprint in this category, which we see as ripe for potential disruption given younger demos increasingly purchasing food and beverage grocery items via digital channels,” Blackledge wrote.

According to a recent survey by Cowen & Co., 65% of consumers surveyed preferred to buy their groceries in a store, with 51% of them stating that they liked to inspect or select the food. Cowen estimates that the online portion of the U.S. food and beverage grocery market was only about 4% retail penetration in 2016, or about $33 billion.

Amazon AMZN, +2.57% is testing the Amazon Go technology in an 1,800-square-foot convenience store in Seattle accessible only by Amazon employees, though the company plans to open it to the public early next year. The retail space automatically detects when products are taken from or returned to the shelves and keeps track of them in a virtual shopping cart. When you’re done shopping, you can just leave the store, and items will be charged to your Amazon account.

“The items are identified and automatically associated with the user at or near the time of the item pick,” according to the abstract of one Amazon patent for the technology, published last year.

The company likens the technology at the Amazon Go store to that used in self-driving cars, saying it uses computer vision and AI to associate items with past purchases made by the consumer. This use of AI and machine learning will make its algorithms smarter for future purchases, and is an early consumer-oriented effort, built using AI tools in the design of the product from the get go, versus enhancing an already existing product.

Despite the work already put into the effort, this could be a costly experiment for Amazon, with the different range of store formats planned, physical retail locations to acquire or rent, technology systems to install and maintain, more employees to hire and, of course, keeping inventory stocked. The cost of Amazon’s vast physical warehouse infrastructure build-out over the past few years has only been eclipsed in cost by the money its spends on shipping products to customers of its Amazon Prime service, which includes free shipping.

Building more physical stores—the WSJ and BI reports say Amazon will build up to 2,000 brick-and-mortar locations—will certainly add to Amazon’s already hefty spending. But if any dot-com can handle the financial outlay necessary to finally break into the grocery business and make it work, it will likely be the company that already did the same to bookstores.

Wall Street seems bullish on the efforts, with Amazon’s shares gaining nearly 3% on Monday. The online-retail giant’s stock has increased 12.4% so far this year, handily outpacing the S&P 500 SPX, +0.58% index, at 7.9%, and Dow Jones Industrial Average DJIA, +0.24% , which has gained 10.3%.

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