Amazon bought Whole Foods to solve its biggest problem in the grocery business (AMZN)

pulse

August 22, 2017 7:55 PM

Amazon bought Whole Foods as it tries to address the biggest current problem with its online grocery shopping business.

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It's no secret that Amazon is ramping up its food delivery business.

It's been the reason many investors think the company bought Whole Foods for $13.7 billion in June.

But, according to a recent survey from Morgan Stanley, there's another reason. Buying Whole Foods allows Amazon a physical location for customers to see the groceries they are buying.

A huge 84% of customers say they want to see the food before they buy it, Morgan Stanley said, which is consistent with the survey results from last year.

"WFM's store footprint (with 45% of the US population within 10 miles of a WFM) is likely to accelerate AMZN's grocery gains," Morgan Stanley said in a client note.

Nearly one-in-four of those surveyed by Morgan Stanley have tried online grocery shopping at least once in the last three months, and many of them used the website of a traditional grocer. Online-only offerings, like Amazon's Prime Fresh, have been less popular, penetrating only 13% of those surveyed.

Whole Foods joins Amazon's online offer with a familiar brick-and-mortar location that potentially expands the number of locations available for Prime Fresh delivery. Amazon's delivery service is only available in 12 cities right now, according to Morgan Stanley.

Online grocery orders will probably never take over the grocery industry though, the bank said. Customers typically shop at three different stores to meet their grocery needs, and Morgan Stanley sees online grocery orders as just a part of a customer's future shopping habits.

Online shopping currently accounts for 16.1% of the total retail industry, and only 2.9% of the total grocery industry. In 2020, Morgan Stanley expects online sales to grow to 20.7% of the retail industry, and only 3.6% of groceries.

The expected increase in online grocery sales is small, but might get a bump from changing attitudes. Only 37% of those surveyed said they are "very unlikely" to buy online, down from 47% two years ago, according to Morgan Stanley.

Amazon's stock is up 28.06% this year.

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