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Amazon.com (AMZN - Analyst Report) has announced the expansion of its online grocery delivery service, AmazonFresh, in San Francisco.

AmazonFresh was introduced in 2007 on a small scale near Amazon’s headquarters in Seattle and later expanded it to Los Angeles. The service enables users to order groceries online which are delivered either on the same day or the next, thus saving time and effort.

By paying $299 a year, AmazonFresh users in San Francisco and Los Angeles will be able to avail free shipping on orders above $35. Additionally, they will get a subscription to Amazon Prime — a $79-per-year service that includes free two-day shipping on many Amazon items and access to the company's video streaming selection. Also, Amazon will offer a free 30-day trial for the San Francisco customers.

Though Amazon is not very optimistic about generating high margins from the grocery delivery service, it expects this expansion will widen its operational activities (shopping) to different categories from electronics to clothes to household essentials.

With a view to make this expansion a success, Amazon has already started investing in warehouses.

Amazon’s expansion plan is likely to pose a threat to other existing grocery chains like Kroger Co. (KR - Analyst Report), Safeway Inc. (SWY - Analyst Report) and Whole Foods Market (WFM - Analyst Report), as well as other retailers such as Wal-Mart Stores Inc. (WMT) and Target Corp (TGT).

Grocery is one of the most difficult sectors to crack, especially when it comes to online shopping, as is evident from the now defunct business of Webvan. These endeavors often meet with failure as the operational cost (cost incurred in maintaining infrastructural facilities for delivery on time, warehousing facilities for storage of goods, etc.) is exorbitant, while margins are low. Also, since the grocery items are mostly perishable in nature so it further increases the chances of wastage and hence, it is not possible to forecast demand too in this sector.

Currently, Amazon has a Zacks Rank #3 (Hold).

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