The new push by Walmart Stores Inc., Kroger Co. and other food retailers into the online grocery business is about to face even tougher competition from Amazon.com Inc.

Amazon is planning to build brick-and-mortar convenience stores that offer fresh foods for sale and give customers the option to purchase shelf-stable goods for later delivery, people familiar with the matter said. The company also plans to open sites that offer curbside pickup, these people said.

The new Amazon stores will compete with grocery stores on their own turf, and come as traditional retailers, including Wal-Mart, are rapidly expanding their online grocery services, particularly curbside delivery services known as “click and collect,” aimed at attracting busy grocery shoppers in the Midwest.

Supermarkets battered by a rough patch in food retail are hoping curbside delivery will help them not only keep market share as more shoppers turn to e-commerce, but also coax shoppers into their stores to buy additional items when they collect orders. Other retailers are offering one-hour delivery and eye-catching apps to attract millennials and shoppers looking for convenience.

Online sales remain a fraction of total supermarket sales. Among traditional food and beverage stores, e-commerce accounted for $1 billion in sales in 2014, or 0.16% of the $670 billion market, according to U.S. Commerce Department figures.

But big e-commerce vendors, such as Amazon Fresh and other online mass merchants, racked up more than $6.3 billion in food and beverage sales in 2014, up 20% from 2013, the federal figures show.

“A lot of transactions are moving to mobile. Demographics are changing,” Randy Burt, a partner at the A.T. Kearney consulting firm, says of the online grocery business. “All these things are combining to create more demand. That’s what’s different.”

While e-commerce’s share of the total grocery industry is expected to remain in single digits for some time, its growth is expected to far outstrip that of traditional supermarkets, analysts say. Food and alcohol sales online are expected to grow 34% in the next five years, compared with 3% in actual stores, according to research this year by the Kantar Retail consultancy.

Part of Amazon’s move and its subsequent expansion into the field was made possible by the reluctance of some big companies to invest heavily in notoriously profit-starved grocery-delivery services. Online ordering with home delivery is the most expensive type of sale for grocery companies, followed by click-and-collect.

But brick-and-mortar grocers are now having some success by offering a wider array of shopping formats for different customers. Technological improvements and warehouse investments, meanwhile, are making deliveries of produce fresher and more tailored, such as the ability to select bananas according to their degree of ripeness.

Online grocery services also have greatly expanded away from cities—and into curbside-pickup services, which allow shoppers to order groceries online and then pick them up at the curb in the stores’ parking lots.

Wal-Mart, the nation’s largest food retailer, has quickly added pickup service to stores over the past year and will offer it in more than 1,000 of its roughly 4,600 U.S. stores by the end of next year. The system is particularly popular with busy parents who don’t want to take children out of car seats or don’t have time to wander cavernous stores, store executives say.

Wal-Mart gravitated to the model, in part, by watching how hard it was to make money with grocery delivery at its U.K. chain Asda.

Wal-Mart executives say they have started keeping more inventory on the shelves rather than in historically overflowing backrooms to give workers more space for fulfilling online orders. At an investor meeting last week, Wal-Mart executives said the retailer would open only around half as many supercenters next year as it did last fiscal year, and will shift spending to increase e-commerce sales, including online grocery.

Kroger, too, is expanding the number of stores where it offers click-and-collect service, which it calls ClickList. The service began at about a dozen stores last year and hit more than 200 locations this summer. Kroger, the U.S.’s largest supermarket chain, said it now offers it at more than 450 locations and plans to expand.

“It’s all about that busy parent who is trying to squeeze in what they are getting for groceries and lunches in between squeezing in everything else,” says Diana Sheehan, director of retail insights for the consulting firm Kantar.

Amazon’s new grocery stores, dubbed internally Project Como, are also meant to capture busy families who want to swing by the store to quickly pick up their grocery orders on the way home from work.

California and Washington still lead the way in total spending on online grocery, but states such as Texas and Florida are starting to catch up, according to a snapshot of online transactions by Adobe Digital Price Index. Some of the biggest jumps in year-over-year growth in sales came in Kentucky, Indiana, Tennessee and other parts of the Midwest, a comparison of transactions in July 2015 and 2016 shows.

Still, some analysts think the online grocery business remains overhyped and overvalued. “This is a very crowded space,” says Nicholas Fereday, a food analyst with the Dutch lender Rabobank. “It’s not enough to have a cool app.”

Source: The Wall Street Journal