Amazon Adapts Grocery Game Plan, Analyst Sees Growth with Smart Carts and Automated Fulfillment Centers

BofA analyst Justin Post reiterated a Buy rating on Amazon.Com Inc AMZN with a price target of $204.

The Information reported that Amazon will remove its Just Walk Out checkout technology from most of the company’s Fresh locations, citing limitations around the technology in larger format stores. 

Instead, “version two” of the stores will be outfitted with Dash Carts, smart carts that let customers scan items as they shop and see their spending on a built-in display. 

Per Amazon’s Senior VP of Grocery Stores, customers have been more receptive to the real-time feedback of Dash Carts through the screen, whereas Just Walk Out could take up to several hours to see a receipt and oſten make budget-conscious customers uneasy. 

According to the Information, budget-conscious customers are uneasy. Per the Information, Just Walk Out is currently installed in 47 of 64 Fresh locations in the US and UK and will still be featured in smaller UK Fresh stores and 22 Go locations. 

Post noted the transition from Just Walk Out is part of the broader push to revamp Fresh locations with more customer-friendly features like brighter colors and coffee shops, as opposed to the possibly “Online-first” design of Amazon’s previous locations. 

Overall, he noted that store changes will continue to evolve in Amazon’s grocery strategy to find what resonates best with consumers before a significant grocery investment cycle.

Also, smart carts should allow Amazon to generate incremental advertising revenue from the stores, as per Post.

Per the Information, Amazon recently opened an automated facility in Long Island to process Online Fresh orders (with plans to expand to WFM and 3P sellers) and plans to open a 20k sq. ſt. fulfillment center in a Whole Foods later in 2024, being part of Amazon’s goal of eventually letting Amazon.com shoppers purchase groceries from multiple banners and receive all items in a single delivery. 

Once up and running, these automated facilities are being designed to process the delivery volumes that five nearby stores had previously. 

Post noted that Amazon is testing an opportunity to make Online grocery delivery more efficient with automated facilities (with the offset being longer delivery distances). 

Also, building out a limited number of fulfillment centers dedicated to groceries suggests Amazon will be more measured in grocery investments while assessing the opportunity vs. a rapid multi-billion buildout, as per the analyst.

Post noted grocery expansion for Amazon as a when, not if, event given the frequency of grocery shopping, the potential for customer lock-in, and scale advantages. 

He said that Amazon’s grocery strategy and offers continue to evolve (test and learn), such as adjusting the free delivery threshold from $35 baskets to $150 and then down to $100 as the company refined unit economics. 

With media reports suggesting that Amazon is seeing early success with the new grocery strategy, marked by expanding “version two” stores, investment levels may increase in 2024, Post said. 

However, given Amazon’s fourth quarter call comments that retail efficiencies (North America margins ex-advertising) can exceed pre-pandemic levels, he expects grocery expansion to be measured in the near term, which is a favorable strategy for investors in 2024. 

The re-rating builds on Amazon’s continued expansion of North American retail margins.

Price Action: AMZN shares are up 1.12% at $182.71 on the last check Wednesday.

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