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Amazon trying to push past Wal-Mart, Target in pitch to major food brands

  Amazon’s ambitions to upend the grocery market appear to be getting larger.

Just two days after the online retailer said it is testing free grocery pickup that could eventually be rolled out to paying Prime members, Bloomberg reports it is working to convince major brands they’d be better off selling their goods directly to shoppers.

That means bypassing brick-and-mortar chains like Wal-Mart, Target and Costco, according to Bloomberg.

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The news service obtained an invitation Amazon sent to packaged goods companies for a meeting in May to discuss the initiative, which would require them to package their products in new ways. General Mills and Mondelez are among the companies expected to attend, Bloomberg reported.

In response to a request for comment from CNBC, Amazon said: “This conference is about encouraging our biggest suppliers to innovate with us across the supply chain to benefit customers. We will discuss topics like packing reduction, which has a broad range of benefits from faster delivery to customer delight to reduced waste.”

Spokespersons from Costco and Mondelez did not immediately respond to CNBC’s requests for comment. Target declined to comment.

A spokeswoman from General Mills said the maker of Cheerios and Yoplait typically doesn’t discuss relationships with its retail partners.

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“Clearly e-commerce is an emerging area, and we’re working to grow our business in this space, but we’re also continuing to work with our established retail partners,” the spokeswoman said in an email. “We’re always looking at ways to update our packaging, but don’t have anything to share with you today.”

A spokesman from Wal-Mart said the company has a “huge food and consumables business online,” and is “constantly talking with suppliers about creating efficiencies in shipping.”

Just looking at Wal-Mart’s scale shows how detrimental it would be for a brand to ignore.

In fiscal 2016, Wal-Mart and its affiliates accounted for 20 percent of General Mills’ consolidated net sales and 30 percent of net sales at U.S. retail. No other customer accounted for 10 percent or more of its consolidated net sales, according to General Mills’ annual filing with the Securities and Exchange Commission.

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In total, grocery accounts for more than 50 percent of Wal-Mart’s annual U.S. sales.

Additional challenges companies would face in cutting out retailers include the high cost of delivering small orders to individual households. This step in the fulfillment process, known as last-mile delivery, is the most expensive.

The grocery business has been one of the most resistant categories in the shift to online spending. Not only do most shoppers prefer to pick their own produce, but fresh food is a notoriously low-margin business. It requires a sophisticated supply chain and quick sales to prevent items from spoiling.

Yet while Cowen & Company estimates online sales will account for less than 6 percent of total grocery revenue this year, it expects that penetration to double in five years. Millennials between ages 25 and 34 are seen driving much of that growth, Cowen said.Walmart-Online-Shopping-1.png

Amazon and Wal-Mart are expected to be two of the biggest beneficiaries of this transition. Wal-Mart’s online grocery service, which lets shoppers order food online and schedule a pickup time, has been credited with much of the momentum in its consumables business. After rolling that initiative out to more than 600 locations last year, it will add 500 in 2017, a spokeswoman said.

Amazon’s foray into grocery has been slower to take hold. The retailer last year eliminated the $299 annual fee for its AmazonFresh service, opting instead for a monthly $14.99 charge. And on Monday, The Wall Street Journal reported the public rollout of Amazon Go, a Seattle test store that ditches the cash register, has been postponed.

“The bigger story here is what going direct through Amazon and having these relationships in place would mean for [Amazon’s] future,” Forrester analyst Brendan Witcher told CNBC. “Anyone who is paying attention can see that Amazon is building a ‘grocery-to-home’ ecosystem not unlike what Apple did for the music industry.”

“All retailers should see this as a shot across the bow,” since the model could easily be applied to any type of commodity product, Witcher said.

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