Amid Grocery Delivery Shutdowns, It Appears Even Amazon Cares About Costs

Amazon.com, Inc. AMZN is signaling retreat.

The e-commerce giant is pulling its AmazonFresh grocery delivery service from suburban regions in Pennsylvania, New Jersey and possibly Maryland and California, conceding the model’s unprofitability and unsustainability.

As it betrays a fresh interest in profits, competitors in grocery, retail and logistics are celebrating victories — both for the battle and for the war.

The Analysts

Bernstein’s Brandon Fletcher covers bulk and discount retail, including Target Corporation TGT and Dollar Tree, Inc. DLTR.

David Vernon covers logistics, airlines and railways, including FedEx Corporation FDX, United Continental Holdings Inc UAL and American Airlines Group Inc AAL.

The Ratings

• Dollar General Corp. DG: Outperform, $88 price target
• United Parcel Service, Inc. UPS: Outperform, $132 price target
• Target: Outperform, $68 price target
• Dollar Tree: Market Perform, $78 price target
• Wal-Mart Stores Inc WMT: Market Perform, $84 price target
• FedEx: Market Perform, $212 price target

The Thesis

Without high subscription fees or a cost-reduction model to boost margins, grocery delivery in non-urban areas is too expensive for a pure e-commerce firm to sustain, according to Bernstein.

Amazon’s pullout and implicit emphasis on profitability will lessen pricing pressure on grocery competitors both immediately and in the long term, while also justifying the role and strategy of delivery rivals, the analysts said.

Price Action

SPDR S&P Retail (ETF) XRT has fallen 8 percent over the last six months, while Direxion Daily Transportation Bull 3X Shares TPOR has risen 19 percent.

At the time of publication, Dollar General was down slightly at $80.22; Dollar Tree was trading at $92.81, down less than 1 percent; and Target was down 2.11% at $58.04. Wal-Mart was nearly flat at $88.74, FedEx was up slightly at $221.68 and UPS was down slightly at $113.85.

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Photo courtesy of Amazon.