Amazon said to launch Pantry to take on Costco, Sam's

Alistair Barr | USA TODAY

SAN FRANCISCO — Amazon.com is working on a new business called Pantry that will help it expand further into the giant consumer package goods market and take on warehouse club stores Costco and Wal-Mart's Sam's Club, according to three people familiar with the effort.

Pantry, which is run by Billy Hegeman, a senior manager in vendor management and consumables at Amazon, is currently set to launch in 2014, the people said on condition of anonymity. They did not want to be identified because Amazon's plans are still private.

Amazon spokesman Scott Stanzel declined to comment Thursday afternoon.

The service will be targeted at existing members of Amazon's Prime shipping program. It will launch with about 2,000 products typically found in the center of grocery stores, such as cleaning supplies, kitchen paper rolls, canned goods like pet food, dry grocery items like cereal and some beverages.

Amazon will let Prime shoppers put as many of these items into a set sized box, up to a specific weight limit. If the products fit and they don't exceed the maximum weight, Amazon will ship the box for a small fee.

Pantry will put Amazon into much closer competition with Costco and Sam's Club, which specialize in selling a limited number of items in huge volume at very low prices, according to retail industry experts.

"Amazon has the clubs in their cross hairs," said Keith Anderson, who leads RetailNet Group's Digital Advisory practice."This will be a potential issue for Costco."

Warehouse club members tend to be higher income households with kids — the type of shoppers that have huge lifetime value to retailers.

The demographics of an Amazon shopper are similar to the club store shopper and Amazon wants to appeal to that audience, one of the people familiar with the effort explained.

The consumer packaged goods, or CPG, market is worth about $850 billion a year in the U.S., but most of that spending still happens in physical grocery stores. This gives Amazon a big new sector to grow into, if it can successfully tackle some of the problems inherent in shipping big boxes of cereal and heavy cans to people's homes.

Bernstein Research recently estimated that the CPG opportunity for e-commerce companies is worth about $470 billion a year. Amazon can profitably capture at least $222 billion of such spending per year, according to the firm. Amazon's total revenue was just over $61 billion in 2012.

"We expect Amazon to take advantage of its strong relationship with Prime users, its existing infrastructure, and its leading online channel to continue to grow aggressively in CPG," Carlos Kirjner and other analysts at Bernstein wrote in a recent note to investors.

Amazon and other e-commerce companies have struggled to break into the packaged goods market so far because of the high cost of shipping online orders. The cost of a pack of Coke cans, for instance, is about the same as it costs Amazon to ship the item.

Encouraging consumers to put multiple items into a single box increases revenue from each order, potentially helping Amazon cover the shipping cost.

Amazon has designated at least four fulfillment centers to store Pantry inventory and process orders, according to two people familiar with the program.

Amazon can use its extended network of fulfillment centers "to enable better shipping economics than the current .com business," said Tom Furphy of Consumer Equity Partners. "So they'll be able to carry heavier and/or less expensive items than they have been able to previously."