Amazon (AMZN, $1,714.83) focuses on physical stores to beat competition

E-commerce giant Amazon is now planning to open more physical grocery stores, a sector currently dominated by the likes of Walmart (WMT).

According to the Wall Street Journal, with the acquisition of Whole Foods Amazon got its first real taste of store-based grocery sales, but Amazon’s grocery models will be starkly different from that of Whole Foods. 

But this move comes with its own set of challenges. Amazon can't evade the costs associated with getting groceries to consumers. Even though the company could remove expenses associated with established physical stores, it’s already a notoriously low-margin business, and Amazon Web Services is the primary source for the company's profits.

Additionally, recent figures suggest that Amazon’s online grocery sales are not remarkably higher than those of Walmart’s physical grocery sales – 12.5% to 11.1% in 2017.

Going ahead with its plans, Amazon will now have to open dozens of relatively smaller brick-and-mortar locations across the country. The first such store is expected to appear in Los Angeles, possibly as soon as the end of this year, and more to follow in 2020. Few other steps include opening 3,000 Amazon Go stores by 2022, closing all 87 in-store pop up locations inside retailer like Kohl’s (KSS), and opening traditional grocery stores by acquiring smaller, local chains among others.

Among these, a more traditional grocery store is probably the best idea as it gives opportunities for Amazon to serve more customers, who'll be further immersed in its Prime loyalty ecosystem. In addition, the vast customer data is has acquired over the years, the physical sales are likely to bear fruits.