By Nate Wolf

Investors are understandably excited about Amazon.com's ambitions to scale its grocery-delivery business, but the move comes with downside risks, one Wall Street analyst says.

Groceries are one of the few new categories that can move the needle for the e-commerce giant, argued Ken Gawrelski of Wells Fargo Securities in a research note Friday. Grocery delivery, however, remains a complex operation even for a company as large and proven as Amazon.

The company announced last week that it added perishable groceries to its same-day delivery service in 1,000 cities nationwide -- with plans to expand that number to 2,300 by year's end. The service is free for orders over $25 for Amazon Prime members and costs $12.99 for nonmembers.

Amazon shares ticked up on the announcement, while rival grocery and food-delivery stocks like DoorDash, Kroger, and Instacart fell sharply. Amazon stock was rising another 2.2% to $226.91 on Friday.

The company's interest in the category is well-documented. It acquired the Whole Foods Market chain in 2017 and operates the Amazon Fresh delivery and supermarket business. But this move is different, Gawrelski said.

"AMZN utilizing its most critical distribution vehicle, Prime, to accelerate grocery market penetration efforts suggests AMZN believes it must be 'all in' now in grocery," he wrote.

The localization of Amazon's fulfillment footprint and the growth in consumer adoption of grocery-delivery services appears to be the primary driver of the company's latest initiative, Gawrelski said. But the grocery category's margin profile isn't particularly attractive, and investors should "proceed with caution," he wrote.

Amazon didn't immediately respond to Barron's request for comment.

At the $25 minimum order for free delivery, Amazon could lose around $5 an order in Wells Fargo's worst-case model. That means every additional percentage point of U.S. grocery market share would equal $2.5 billion to $3 billion in losses.

Most orders won't come in at exactly $25, so this downside scenario is unrealistic, Gawrelski acknowledged. But the estimate shows the risks of trying to squeeze operating income out of a complex operation.

That said, it's difficult to dismiss Amazon when it comes to overcoming operational challenges. "We would never bet against AMZN's logistics capabilities and do expect AMZN will meet consumer needs for tighter delivery windows," Gawrelski wrote.

Wells Fargo reiterated an Equal Weight rating and a $245 price target for Amazon stock.

Write to Nate Wolf at nate.wolf@barrons.com

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August 22, 2025 12:56 ET (16:56 GMT)

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