The wide-moat online retailer's well-earned reputation for convenience--a component of our brand-intangible asset moat source--could be enhanced by checkout-free shopping.
On Dec. 5, Amazon
unveiled its long-rumored convenience-store concept, dubbed Amazon Go, an 1,800-square-foot prototype in Seattle that features checkout-free shopping for ready-to-eat breakfast, lunch, and dinner options and a mix of staple products and meal kits. The most noteworthy part of the prototype is Amazon's "Just Walk Out" technology, which detects when products are taken from shelves and tracks purchases via a virtual shopping cart on the Amazon Go mobile app (which is scanned as consumers enter the store). According to The Wall Street Journal, this is part of a larger push by Amazon toward physical grocery stores, which could include "more than 2,000 brick-and-mortar grocery stores," with future larger prototypes offering curbside pickup and drive-thru options. The announcement won't immediately affect our $900 fair value estimate, but we'll continue to monitor and adjust our valuation assumptions as Amazon's physical store aspirations become more visible.
R.J. Hottovy, CFA, is a consumer strategist for Morningstar.
The idea of Amazon physical stores seems to run counter to its successful online operations, which offer tremendous scale advantages. That said, we see a few reasons that this endeavor could succeed. First, by eliminating checkout and automating inventory replenishment--both of which could drive higher inventory turns versus traditional grocers--Amazon could effectively offset its lease costs. Second, we believe Amazon views physical stores as an extension of its logistics capabilities. While an 1,800-square-foot format would be too small to handle a high volume of order pickup/returns, we could see larger formats offering these capabilities. Third, by tying the service to a mobile app, it bolsters the network effect behind our wide moat rating while unlocking order frequency and targeted marketing opportunities. Finally, and perhaps most importantly, Amazon's well-earned reputation for convenience--a component of our brand intangible asset moat source--could be enhanced by checkout-free shopping.
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