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Amazon Plans Major Move Into Grocery Business

Peter Dazeley | Getty Images

Amazon.com is planning a major roll-out of an online grocery business that it has been developing for years, targeting one of the largest retail sectors yet to be upended by e-commerce, according to two people familiar with the situation.

The company has been testing AmazonFresh in its hometown of Seattle for at least five years, delivering fresh produce such as eggs, strawberries and meat with its own fleet of trucks.

Amazon now plans to expand the business outside Seattle, starting with Los Angeles as early as this week and the San Francisco Bay Area later this year, according to the two people, who were not authorized to speak publicly.

If the new locations go well, the company may launch AmazonFresh in 20 other urban areas in 2014, including some outside the U.S., said one of the people.

Bill Bishop, a prominent supermarket analyst and consultant, said Amazon was targeting as many as 40 markets but would disclose how he knew of its plans.

An Amazon spokeswoman did not respond to a request for comment Tuesday.

Amazon is searching for large segments to enter as it tries to maintain a growth rate that has fueled a 220 percent surge in its shares over the past five years. The U.S. grocery business, which generated $568 billion in retail sales last year, may be a ripe target.

The expansion plans are a potential threat to chains such as Kroger, Safeway and Whole Foods Market, as well as general-merchandise retailers Wal-Mart Stores and Target, which also sell a lot of groceries.

"Amazon has been testing this for years, and now it's time for them to harvest what they've learned by expanding outside Seattle," said Bill Bishop, chief architect at Brick Meets Click, a consulting firm focused on retail technology.

"The fear is that grocery is a loss leader, and Amazon will make a profit on sales of other products ordered online at the same time," he said. "That's an awesomely scary prospect for the grocery business."

A successful foray could also help underwrite the development of a broad-based delivery service using Amazon trucks to deliver directly to homes, which could have implications for UPS, FedEx and other package-delivery companies that currently ship Amazon goods.

Still, groceries have proved one of the most difficult sectors for online retailers to crack. One of the most richly funded start-ups of the dot-com era, Webvan, was a spectacular failure as the cost of developing the warehouse and delivery infrastructure proved overwhelming.

Roger Davidson, a former grocery executive at Wal-Mart, Whole Foods and Supervalu, said Amazon will struggle to make money from AmazonFresh because fresh produce can easily go bad in storage warehouses and get damaged during delivery.

"Will it work? I would bet against it," Davidson said. "The reasons these businesses have failed in the past have not gone away."

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