Amazon Indicates Big Plans For 2016 With Restaurant Delivery

  • Amazon enters restaurant delivery business alongside established players like Ubereats.
  • This is likely to become a success due to Amazon's brand power, millions of Prime customers and marketing resources.
  • Moreover, some other recent moves puts the company in a strong position for 2016.

Amazon (NASDAQ:AMZN) recently expanded its restaurant delivery via the Prime now mobile app. till recently, patrons could only use it in specific Seattle zip codes. However, the company recently expanded the service to Baltimore. This will act as a testing bed before it is rolled out across the United States and beyond.

Interestingly, Amazon is entering a market with well-established big players such as GrubHub (NYSE:GRUB) and Ubereats. However, due to the fact that the company has Prime users running into the tens of millions, they won't be marketing the service from a standing start. As is usually the case with Amazon launches, they will use their homepage and advertising to push the service out to the masses.

For now, the service is only available to Amazon Prime Now customers. The restaurant ordering experience is familiar in the sense that it is similar to how one might order a product. Customers will be able to track the delivery from the moment the cooking process begins at participating restaurants to the instance it is delivered.

Interestingly, Amazon isn't hitting customers with any delivery fees. Instead, Amazon has chosen to adopt a revenue share model with participating restaurants. Restaurants invited to the venture would be able to expose their business to customers who may have overlooked them amidst the sea of competition. Moreover, by partnering with a giant like Amazon, they will hope that they are able to grow their business in direct correlation with the popularity of the service.

Similar services such as Grubhub and UberEats are placed in a difficult position. They simply don't have the scale, marketing budget, or brand power which Amazon enjoys. 

I am going to play devil's advocate for a little while. It is plausible that Amazon is using this Prime Now delivery service as a data gathering exercise in order to launch their own independent restaurant delivery business.

Amazon likes to have control over their ventures. We recently witnessed this exemplified with reports that Amazon wants to purchase Boeing jets in order to have their own air-delivery service. This will allow them to have greater control over the delivery chain.

Secondly, Amazon also established control in the eBooks industry. They sold the Kindle below cost, thereby flooding the market. Amazon's control is exemplified by the fact that it is challenging for an author to get a coveted bestseller without having their book available on Amazon.

It is this insatiable appetite for diversification which is fueling Amazon's growth.

In 2015, the restaurant industry generated $709.24 bn in revenue. Amazon would love to take a significant chunk of this revenue. Therefore, a fully fledged food delivery business with Amazon Prime as its backbone could add significant revenue to Amazon's topline.

Amazon Stock performance

Amazon's admirable performance in 2015 has led to a widely held view in the market that it was the must-have stock of 2015. However, such strong performance is a blessing and a curse. Investors will be looking to see the momentum continue into 2016, and if Amazon fails to hit the market's high expectations, the Amazon stock is likely to face the wrath of the market.

For instance, net income growth in Q4 2015 came in at approximately 118% as compared to Q4 of 2014. This indicates the management's ability to make wise decisions and investments which add to the bottom-line.

Secondly, Amazon stock price gained 116.9%  over the past 12 months. This is due to a myriad of factors. Amazon has shown a thirst for growth by innovating its Prime delivery service and generating stratospheric profit growth for their AWS platform.  Saying this, it is unlikely that such a run up in Amazon stock price can be sustained. Current holders of Amazon stock will be hoping that Amazon at least maintains its revenue figures.

Conclusion

In conclusion, Amazon stock has put in a superb performance in 2015 and is set to build on it in 2016. The potentially speedy roll-out of restaurant delivery through Prime Now coupled with the revenue share with invited restaurants should add significant revenue to Amazon's topline.

Interestingly, Amazon has more plans for 2016. Amazon Prime Air is set to make a debut. Moreover, if an air cargo business with Boeing lifts off, they would be able to add a new revenue stream.

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